Apr 13 • 4M

Central Banks Are Showing Signs Of Extreme Stress

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Anthony Pompliano
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To investors,

We have been discussing the financial situation in Lebanon for the last two years. It started with the street protests in April 2020, continued with more severe social unrest as their currency devalued in June 2021, and finally culminated in a pseudo-bankruptcy by the government of Lebanon earlier this month.

This has been an unfortunate situation to watch as it unfolds, but the outcome was obvious as the problems got larger and the central bank was unable to properly address the issues.

This begs the question — is Lebanon a unique situation or does it signal a bigger problem in the system?

The short answer is that no one knows for sure yet, but we just got another worrisome data point yesterday. The government of Sri Lanka announced that they will be unable to service their debt obligations, which essentially renders the country bankrupt.

In the announcement, the Ministry of Finance stated:

“Sri Lanka has had an unblemished record of external debt service since independence in 1948. Recent events, however, including the effects of the COVID-19 pandemic and the fallout from the hostilities in Ukraine, have so eroded Sri Lanka's fiscal position that continued normal servicing of external public debt obligations has become impossible.”

The situation in Sri Lanka is a good example of what countries are facing at the moment. They had already pushed themselves to the limit of risk through past monetary and fiscal policy decisions, which left them unprepared for the events that would transpire from 2020 to 2022.

First, the COVID-19 pandemic raged globally and locked-up citizens in their homes per government mandates. This drastically hampered the economic growth of a tourism-dependent country like Sri Lanka. Next, the undisciplined monetary and fiscal policy response to the pandemic led to drastic devaluation of various currencies, including a race between central banks to devalue on a relative basis as well. Lastly, the Russian invasion of Ukraine was the last straw once various commodities, from oil to natural gas to wheat to fertilizer, skyrocketed in price.

For two years, governments and central banks have been thrown curveball after curveball. Those in the strongest economic positions have been able to weather the storm, but the countries in a weak economic position are being exposed.

My friend Marty Bent put it eloquently when he wrote:

“What we're seeing play out now is something we've discussed many times in this rag; the weakest free float fiat currencies in the world are failing first. Many may sit there and think, "Who cares if the Sri Lankan rupee fails? It's the Sri Lakan rupee." However, this is how the end game plays out. The weakest die first. And every weak currency that dies leaves behind a smaller pool of currencies that are doomed to the same fate. The Sri Lakan rupee may have been the weakest currency today, but at some point in the future we'll wake up to discover that the euro was the weakest currency to fail on a particular day. We'll wake up to find that the dollar found itself alone in the ring against something like bitcoin and ultimately faltered because it was the weakest currency at that particular point in time.

It may be able to dismiss the Sri Lakan and Lebanese governments defaulting on their debt as nothing more than a nothingburger. But I urge you to recognize it as a leading indicator of things to come for the rest of the fiat currencies on the planet. Lebanon and Sri Lanka were two of the first to fall. Failure is climbling up the ladder and it will reach your fiat currency in due time. When that eventually happens, you better have a contingency plan.”

There are many bitcoin critics who will roll their eyes and claim that bitcoin enthusiasts are cheering on the failure of these currencies, central banks, or governments. This is not accurate in my opinion. Bitcoiners have been warning about these issues for years and now the issues are playing out.

Everyone understands that the failure of a currency or the bankruptcy of a government means significant pain for the average citizen. No one wants to see that happen. Most bitcoiners wish that bitcoin wasn’t necessary. Ideally, the legacy system could self-correct and prevent the potential pain that lays ahead. It doesn’t appear that is going to happen though, so bitcoin becomes a unique solution that provides an escape path for billions of people.

We have seen Lebanon and Sri Lanka declare bankruptcy in the last two weeks. Hopefully they are the outliers and no other countries will follow. But I’m not counting on it. Many countries are buckling under the stress created by COVID, undisciplined monetary and fiscal policy, supply chain disruptions, and the commodities boom post-Russian invasion of Ukraine.

Stay alert out there. The world is changing and it is important to remain educated. Hope everyone has a great start to their day. Talk to everyone tomorrow.

-Pomp

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Podcast — Anthony Pompliano

Dylan LeClair is the Senior Market Analyst at UTXO Management, a digital asset fund investing in the analog to digital transformation of money and the emergent financial system.

This week, my brothers Joe & John helped fill in to speak Dylan for our weekly podcast. In this conversation, they discuss the Bitcoin Conference, the most important chart in finance right now, Bitcoin's correlation to the Stock Market, and Inflation.

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