From a NY Times article:
What is the trilemma in international finance? It stems from the fact that, in most nations, economic policy makers would like to achieve these three goals:
• Make the country’s economy open to international flows of capital. Capital mobility lets a nation’s citizens diversify their holdings by investing abroad. It also encourages foreign investors to bring their resources and expertise into the country.
• Use monetary policy as a tool to help stabilize the economy. The central bank can then increase the money supply and reduce interest rates when the economy is depressed, and reduce money growth and raise interest rates when it is overheated.
• Maintain stability in the currency exchange rate. A volatile exchange rate, at times driven by speculation, can be a source of broader economic volatility. Moreover, a stable rate makes it easier for households and businesses to engage in the world economy and plan for the future.
But here’s the rub: You can’t get all three. If you pick two of these goals, the inexorable logic of economics forces you to forgo the third.
...
Is there a best way to deal with this trilemma? Perhaps not surprisingly, many American economists argue for the American system of floating exchange rates determined by market forces. This preference underlies much of the criticism of China’s financial policy.
His general point is a very interesting one, but I think he is mischaracterizing the part about China's currency. No one is saying that China's policy is bad because it is maintaining a stable exchange rate. Stability is fine. The concern is that the rate is being set at a level that is designed to favor domestic producers over foreign competitors.
