What happens when a government defaults on its ability to pay debt? On April 18th, Sri Lanka missed its deadline to pay $78 million in global bond payments.
Now, the country is on a trajectory of the biggest default in its history, worth $12.6 billion in overseas bonds.
The default trajectory is followed by mass riots amid food, power, and petroleum shortages. In such a scenario, a nation without much in the way of natural resources and monetary power is left with little recourse except to engage in money “printing” to pay for wages temporarily.
As the Federal Reserve increased its balance sheet by $4.5 trillion over the last two years, the central bank triggered an inflation rate above 8%, 4x higher than its 2% target. Yet, this is small compared to Sri Lanka’s nearly 30% inflation, going to 40%.
Such volatility is traditionally found in small-cap penny stock trading—not national currencies. Yet, this is the difference between having a global reserve currency as a cushion and depending on that currency.
From this subservient fiat currency position, Sri Lanka’s energy minister summed up the dire situation as “There aren’t enough dollars available to open letters of credit.”
In other words, despite the Fed’s unprecedented money supply increase that caused its inflationary devaluation, the dollar is comparatively superior to any other currency. This is its Bretton Woods legacy. As such, it is so high in demand that indebted nations can’t even use it for more debts—or is it?
El Salvador: The Beginning of a New Bretton Woods?
On Monday, May 16th, El Salvador’s president Nayib Bukele said he hosted a major central banking event. Already dubbed the Davos for Bitcoin, it gathered 32 central banks and 12 financial institutions from 44 countries. Without being the first nation to make Bitcoin legal tender, it is highly unlikely that this small country would become a host for…
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