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Sri Lanka Just Crashed – Is this our future?

Updated: Oct 21, 2022

I just got back from a six-week long trip to Greece and Turkey and it was fantastic. If you watched my one of my podcasts that just came up recently, I think last week, actually, you saw one of the reasons I went to Turkey was to experience the hyperinflation those poor people are going through and it’s not pretty. If you watch that podcast, you know that I talked about people’s rent, doubling, tripling and the cost of things on the ground are just incredibly expensive. I just feel for the people of Turkey. But the reason I went there is because I think Turkey is just on the leading edge of what’s going on in a lot of these countries in the world. And I think it’s portending, something that’s going to happen to the United States, after all these countries ended up falling like flies. And I think the United States is not just the problem but we also have a set of our own problems that we should be aware of. That’s the only thing, I’m just bringing awareness. 

If you’ve watched any of my podcasts or consumed any of my podcasts over the last couple of years, you see that I’ve been warning about inflation. I’ve been warning about some of this green stuff that we’re putting out that we’re making economic policies around and it’s not sound.  I want to get into this by talking about Sri Lanka. Now, most of us don’t even know where Sri Lanka is. It’s this little country in the Indian Ocean. And it’s a charming little country. But the problem is now they are undergoing some major political strife, economic strife, things that I was just talking about in Turkey are happening in Sri Lanka and that’s creating a revolution, essentially. And could it be the future of things here, it’s going to be the future of other things that we’re going to see around the world. I think it could be a preview, I think it could, and we should just know about it, know how to prepare. That’s all we do here on the wealth architect podcast, we talk about the problems in the world, we also start to think about maybe some of the solutions if those problems occur.

Let’s talk about Sri Lanka. As I said, they’re undergoing this political strife. In fact, I consider it a revolution but you’re not going to see that reported anywhere. There’s major stuff going on. So, these are some of the topics that we’re going to talk about here. We’re going to talk about their massive inflation, and now it’s causing some of the political unrest that’s leading to a revolution. The economy is failing, the country is defaulting on its debt. We’ll talk about that in a second. People are essentially hungry. There’s a poverty level rising. Fuel costs are rising, sound familiar…? Medicines are becoming scarce. This is something that we should look at. They have daily power blackouts. Citizens are storming. They’re protesting all over the place. The President has resigned, and there’s massive economic destruction. That’s really the underlying foundation of all this. So, you know, I was interested in Sri Lanka before, but then I saw the people protests. And those protests have gotten really, they’re not violent, you know, mostly peaceful protests. They’re certainly noteworthy. So, the people stormed the presidential palace where this guy “Goto” he has got a very long last name. So, they just call him “Gota”. They stormed his house, and he’s got this beautiful palace that he lives in. It’s this presidential palace. People were like swimming in his pool and going through his drawers, but they did not burn it down. They didn’t do anything like you would expect during a revolution. But they were sending a message. And then they stormed the government buildings. And just recently, in the last day or two, they stormed the central bank, which is really the cause of all these problems, is the political factions letting the central banks of Sri Lanka destroy the economy. So, it’s not just the politicians who are certainly responsible for a lot of the destruction but it’s the central banks. It’s the printing of the money, as I always warn, like you can’t get something for nothing. So inevitably, he resigned. He resigned because he’s like, “I don’t want people to come in and swim into my pool and people don’t like me anymore.” He’s done a crappy job. And he’s just made blunder after blunder after blunder. Politicians should not be in charge of economics. Very few politicians have any business experience. So why do we put them in charge of economics? And if you put them in charge of economics, that’s the number one thing in your country that’s going to create strife if you don’t get it right. 

What are some of the issues? Well, let’s talk about the policy issues, some of the debt issues and the outside country issues. So, let’s start with policy. There has been a mismanagement of the country just from almost anything you can look at.  And I’m only going to pick out a couple of things. But let’s start with US imports exceed exports. So, if you have to send money out to buy things to bring it in the country, that’s a problem. That’s why people always talk about the trade deficit. If you’re a net importer, you end up spending your money to get goods and services. Now, that’s a consumption economy, essentially. But it’s also a production economy like in Turkey’s case; they need raw materials from overseas. So, they have to pay for those raw materials in dollars. That’s the reserve currency of the world. So, when you pay for the raw materials with dollars, you get raw materials. And then essentially, they manufacture and put some value out on top of it and export them, and hopefully get those dollars back. The problem is, those dollars aren’t coming back in dollars. They’re coming back in rupees; they’re coming back in their currency. And so those are, those are devaluing, which is devaluing the country. You know, they’re trying to get dollars back in the country, but like things are starting to fail, they spend more than they make. Instead of cutting back. Fox example, if you have a high credit card bill, do you go out and spend more money than next month? Well, maybe you do. Maybe you don’t? Hopefully, you don’t. You cut back on your expenses. That’s what normal people in normal countries do. It’s like, “I guess we’re spending too much.” Now we can’t handle what we’re spending, and we’re not getting the return on what we’re spending, we better cut back. Nope, they didn’t cut back, they kept spending more, they’ve got massive trade deficits, and they’ve got massive budget deficits. So, they just keep throwing money at the problem, which long term doesn’t work.  Short term, it’s just basically kicking the can down the road. And now the road is dead ending. They’ve been running these massive trade deficits, where they’re exporting less than they’re importing, and they’re running these budget deficits, and they’re spending more than they have. They’re continuing to do it to buy votes. We’ll talk about that in a second too. And this movement to the green energy thing, it’s ridiculous, people cut off their nose to spite their face to go green. Now, green is a great thing to do. Look, I used to be in the solar business, nobody is more green than I am. But you can’t just say “Okay, tomorrow, we’re going to be green, we’re going to go all solar and wind, which also have their own non green issues attached to them, and nobody talks about those.

A windmill needs huge amounts of oil to be able to turn and then you have to replace that oil every 700 hours. So, they need oil for the windmills. You don’t think about this stuff. This movement to Green has really been expensive without the return that they thought they would get. In fact, the ESG is “A+”. So, they get an A+ rating when it comes to being a green country and doing all the right things and being green. Well, that’s certainly isn’t helping them. In fact, it’s costing them money, they put money into that green infrastructure. And we’ll talk about what they just did to the farmers. So, it’s horrible. What this green movement has done. So enough on that, you’ll start to put together your own picture, you can pick and choose what you want to believe here what you want to believe in there. That’s fine. 

What are some of the policy results? Well, there’s been a doubling down of debt, their debt to GDP ratio has now gone up over 120%. Right, the United States is right around that same price. Or that same ratio, by the way, just so you know. And they got this guy “Gota” to be elected in office in 2019, he had a tax cut agenda. Now tax cuts, I believe in tax cuts, because it’s supposed to spur velocity of money, when you get people moving money around, economies go up. That’s what happened in the Reagan tax cuts. That’s what’s happened over time. And again, when you “do” tax cuts. Now, you could do tax cuts wrong. And basically, if you do tax cuts wrong in a crappy economy where nobody believes in it, then the velocity of money doesn’t change and tax cuts really aren’t worth anything. Because what they do is they bring in less revenue to the government undermining all the problems that you had before. And so, they had a tax cut agenda to buy votes from the right factions to get elected. And he got elected with 52% of the vote, which is not a huge majority. And that’s the problem with democracy is you get the 2% run, and you know what the rest of the country doesn’t really believe it anyway, and since he never cut spending, “we’re going to tax cut taxes”, but we’re not going to cut spending. Look, if you don’t cut spending and you have less tax revenue coming in, it doesn’t take a genius to realize that you’re going to create more of a deficit and that’s what they did.

What did they do? They had to print more money and create even more debt. Sound familiar? I keep saying that… And so now the debt was downgraded. People from the outside are like, “Well, I used to want to loan Sri Lanka money, but like they’re not cutting their debt.” They’re not doing any kind of austerity. They’re actually increasing their spending, even though they’re bringing in less money. It doesn’t take a genius to say, “I’m not going to put my money there. That’s pretty risky.” And so, they pulled their money back, they’re not giving them any more money, which downgraded their debt even further. And then what they did because of this green craziness is they said, fertilizers are bad for the environment. And so, we’re going to ban fertilizers coming from overseas, and they have to import all their fertilizers. So that was a major problem.  First of all, it started as a green thing. But at the end of the day, they didn’t want to export dollars, they wanted the dollars to stay in the country to support their currency. But you can’t buy fertilizer unless you export dollars. So, they just said, “Well, we’re going to call it a green thing and make everybody feel good about the fact that that’s a health thing”. So, they banned fertilizers. Well, what happens to you if you stop fertilizing your crops, what happens? You get less crops, so the farmers would have killed the next year, right? And what happens when you have fewer goods to market like fewer tomatoes, fewer cucumbers, less wheat that your farmers can grow while the price skyrockets; inflation. So, this is all because of this stupid green thing. They also had a dollar shortage as the farmers were now keeping the money in their bank accounts, these dollars that they were using to buy fertilizer and other stuff. So now they couldn’t buy fertilizer, so the dollar stayed there, where the central bank would go in and use the dollars as collateral to support their currency in the foreign markets. You know, they tried but it doesn’t work, just like it didn’t work in Turkey. And so, what they do, they banned luxury goods now they said, “Well, you know, it’s the Coco Chanel, and the Louis Vuitton and the Coach purses that were going to ban” and that would keep more dollars from the rich people in the banks. They moved from a really nice capitalistic society where people were really incentivized to go out and make money to a welfare driven state. They started just giving money out to people, certainly, the COVID crisis exacerbated that they gave free money out to people, well, you can’t have something for nothing. And now those consequences are taking place. 

So, they moved to this welfare state, where they were just buying votes. They were pandering on the political side to buy votes. They pander to the Sinhalese, which is a Buddhist faction, so they can get their votes.  They pander to the Green Movement. They’ve reduced police spending.  All this sound familiar guys?!  They reduce police spending. What happened when they reduce police spending? Well, they had the Easter bombings in 2021. I think now people are like, “well, I don’t want to go to Sri Lanka,” like the tourism has money dropped. They aligned with China then because China’s like, “Oh, we got a little problem over there with Sri Lanka,” just like they’ve been doing with all these other economies in the world. We’ve got a little problem over there. Why don’t we go over there, we’ll lend them the money. And we’ll use their country as collateral. So now they have strings attached to the economy. Same thing with the IMF.  The IMF, which is just a global faction, they go in there and they want to loan the money. The problem is the IMF won’t loan him money right now, because they’re in such financial problems that they don’t think they’re going to get their money back. They put that money into infrastructure to “supposedly” build the economy. They just did it the wrong way. And then they put it into military expansion. What do you need military for in Sri Lanka? So, somebody got paid off there as well? Probably, maybe not? I don’t know. But it sure seems to be “who you know.” The situations have traditionally been why do you need military in Sri Lanka. And then as a result of the Easter bombings and reduced police spending, and all that stuff, tourism plummeted. People are like, “I’m not going to go there doesn’t feel safe to go to Sri Lanka,” This little charming country used to feel really safe, but it’s plummeted. So, 13% of the economy was wiped off the face of the map, because of stupid political decisions. And then foreign currencies continue to be the problem. Here are some of the results from the politics and those policies. No money is being loaned to Sri Lanka right now.  You wouldn’t want to loan money to a country that’s failing. And that’s certainly being played out. They can’t really borrow from the IMF now they’ve tapped China out. So now they’re turning around to their neighbors at high interest rates, like Bangladesh and India and borrowing some money from them, but it’s not going to do any good. They’re just getting into more debt. Like you can’t finance your way out of the problem with the same thing that got you into the problem. It’s just stupid.

Okay, the central bank then devalued the currency, they said, “well, our currency is really sucking wind on the foreign markets, let’s just devalue the currency.” “You know, we can maybe bring in more money and, you know, start selling some of our exports.” The problem with that is that people’s purchasing power dropped, okay, which is inflation. We know that inflation is bad, it sucks to pay double at the pub, it sucks to pay twice as much for a tomato that you paid last year, or for beef or chicken or whatever it is, right? The official rate of inflation is 30.2%. But like the unofficial rate, the real rate, the People’s rate is about 96%.  Things are going up almost double because people are losing faith in in Sri Lanka, and because their currency, on purpose, is being devalued. So, the currency value itself has dropped by 32%. Just in 2022. Alone, horrible, horrible stuff. This is all leading to economic disaster. That’s why we’re here on the wealth architect podcast. If you’re still with me, I built a long case about what the heck is going on there. And it all comes down not to religious problems, not to other people invading, it comes down to economic disaster from within, from within. And these are the people that voted these people into office, right? You can’t blame the politicians when you’re the ones who voted for that.  The people are getting what they deserve. But the politicians are, you know what politicians have always done, they lie to the people, they get elected, and then they get corrupt.

Here’s what we got. We’ve got increasing debt, soaring inflation, currency is being devalued, foreign reserves are dropping, and they’re spending money on stupid, unproductive things. Like if that isn’t a formula for economic disaster, I don’t know what is?! Wait, does that sound familiar at all? Like they’re increasing their debt? Hmm. Their inflation is soaring, hmm. Their currency is being devalued? Well, that’s not happening to the dollar. Right now, the dollar is actually the strongest game in town. But even in the land of the blind, the one-eyed man is king. And so, there’s a currency devaluation going on in that currency with respect to the dollar. But their foreign reserves are dropping. So, they’re their money is going out of the country, and they don’t have that money to be able to trade with. And they’re spending money on stupid, unproductive things like this green movement. When you put all of that stuff together, economies are measured on productivity. Their basic measure of productivity and energy, think back 150-200 years, there wasn’t really an energy business, there were some kerosene lamps hanging on your wall. So, whoever had the kerosene, but even before that, it was the candle makers, and not everybody had candles. So, you know, we certainly weren’t firing smelting plants to make bridges. And so, when you increase energy, and the use of energy, now we use it in transportation and manufacturing, and in almost everything powering our homes. We didn’t have that years ago. And as a result, we had these little tiny economies around the world that were largely agrarian, you know, people grow stuff. Now we’ve got these massive economies and skyscrapers, things that weren’t here 200 years ago, all because of energy. But you can’t sustain the costs of those things, unless you’re productive.

So, when you give people free money, when you give people free things to buy votes, when you give defense contractors favors because you want to buy their boats, or they’re your buddy or whatever, things start to crumble. And so, if you don’t have productivity in the world, in an economy, in your home, you can’t sustain it. Like it’s, it’s so obvious to me, and I hope it is to you. So now the dire consequences are coming home to roost for the Sri Lankans.

And I’ll wrap this up by saying there’s massive poverty and starvation, there’s massive inflation, there’s massive tax increases now coming because they think that’s going to solve the problem. It won’t. And there’s no money left, they only have about a billion dollars left in reserves. And that billion dollar is supposed to take this country, a small country, but it’s a country nonetheless, it’s supposed to offer these people security, it’s supposed to feed these people and clothe these people and house these people in this economy. It’s supposed to keep the economy going, like restaurants are going to be closing, you know, more and more stuff is going to fail. And they’re going to repay their loans so they can get more money. Well, they’ve already defaulted on their loans. They’ve got $8.6 billion due in loans this year. They’ve defaulted on that. They need nearly $30 billion just to save this economy. So, they’re only left with the amount of money that Tom Brady has as a net worth right for this entire country. Like Tom Brady could go in and stand next to them and double the amount of reserves that they have if he had it all in cash. You know, maybe it’s Tom Brady that is the Savior because he can’t do a worse job than what they’re doing now.

What is this all leading to? Well, it’s a preview possibly of what’s going to happen. Certainly, like I’ve been telling you, other countries are going through this Turkey is going through it, I witnessed it firsthand. Sri Lanka is going through it. Argentina is going through it, Venezuela has gone through it and continuing to go through Japan as the new one. Like, look out for Japan, the number 3 economies or number 4, whatever they are in the world, I think they’re number 3. And they’re failing because they’ve been doing this printing money thing for so long. And you start to add Ecuador, and you start to add all these other countries that are failing against the dollar, because the dollar has been the reserve currency. And what happens, let me give you some results or solutions. What happens? Well, the dollar is continuing to be the world’s reserve currency. But Putin is undermining that. And Putin and China are getting together and Putin and China and Iran are getting together and they’re creating this faction that right now we don’t see it’s a threat, right? It’s all of this Putin and Ukraine thing. But now he’s got the strings, and he’s controlling the economy. And so, he’s controlling Europe’s problems. He’s controlling their energy. He’s controlling their food costs, energy has gone up 700% because Europe has made this decision to go off of nuclear, which is a very clean fuel. By the way, they deemed it dirty now they deem to clean again, because they need it. But what has happened, the pendulum swung the other way they did.

Germany did this green stuff from 2004 on, and they became a net producer of solar energy. Yay, go Germany! We don’t want to have that nuclear. So, let’s do solar and wind. The problem is, it’s Germany, like the sun doesn’t shine that much, I mean, shines enough to make them really competitive in the solar business. But you can’t fire up a smelting plant with solar energy, you need gas, you need hydrocarbons. And so, they said, “Well, that’s okay. We’ll get it from Russia.” Well, what’s just happened in 2022, Russia has basically said, “We got shut down,” your reliant, you shut down your nuclear, you shut down all this non green stuff. So, you can go green, and now you need energy? Well, you know what our energy is going to cost you 700% More, it’s gone up seven times, natural gas. What’s that going to do to the European economies, it’s going to crush them. And that’s why the Euro is getting crushed right now. So maybe even European countries are going to be seeing the wrath of this, especially the ones that are kind of the problem children like Italy, maybe Greece and Spain, like there’s major problems going on in the world.

What can you do? Well, if the world is going this way, and I think that this will happen there, the dollar is strong right now, just because they’re relatively strong. It’s not because they’re really strong. Everybody loves the dollar. We don’t, we don’t have the cleanest house either. So eventually, people will see this farce and they’ll go, “you know, maybe we could use something different than the dollar.” So, Russia and China are creating their own basic trading currency, they’ll probably end up using the renminbi the one over in China, or they’ll create kind of a mixed rainbow currency of those things. Or what I think is happening, you’re seeing Russia start to move toward Bitcoin. I know it’s crazy. But it’s the first time in our history that we’ve created anything to compete with some of this money printing that these economies are doing for the first time. And because you know, in the past, that was always gold. We’ll just go back to gold, then we eventually go off the gold standard, we print more money, and people start to realize that that’s pretty cool for a while. And then when you can’t print any more to finance your wars, then the economy collapses, it happens. I’ve studied 700 currencies, it happened every time, we still have a couple left that are still hanging in there. But the dollar has lost 98.5% of its value or 99%, depending on when you start in the last 100 or so years. So, it’s stable, we’ve already defaulted on our debt, we’re just printing money now at a faster, faster rate. I don’t care what the Fed says. So, things are going to Bitcoin. I think because Bitcoin is digital gold, you can’t make any more Bitcoin, there’s a limit on it 21 million Bitcoin will ever be made.

You can transport it, you can trade with it, you can do a lot of things that you could do with gold electronically now. So, it’s taken gold, which used to be the world’s reserve currency, let’s call it, and it’s replaced it with an electronic version of gold. So that’s where I think it’s going. But the bottom line is, if you continue to be irresponsible, by electing irresponsible politicians who control your economy, you’re going to end up with irresponsible results, you’re going to end up with poverty. You’re starting to see food shortages in some places here in the West. You’re going to end up with inflation, you’re going to end up with massive tax increases, let’s go after the rich, the people that actually create the jobs, you can dispute that all you want. But I’m studying history. And I see this is what happens throughout history.

And so, at the end of the day, if you don’t prepare by putting yourself in assets that can hedge inflation, if you don’t prepare by structuring your taxes so that you’re not hit with these huge tax increases, if you don’t prepare by investing in things, maybe like Bitcoin or something else, that’s going to be a store of value, or maybe even a currency, or at least it will be part of the solution. I’m not saying bitcoin is the only solution, I think it is part of the solution, then you’re just sitting here waiting for things to happen. And then you’re going to be like these poor Sri Lankan people that didn’t prepare. And they’re like, “well, we put all these people in charge, and they didn’t take care of us.” But now it’s too late. We lost our net worth, we lost our business, we were paying these huge high prices. We send our money overseas just to make sure that it’s saved. We ended up creating the same problem, let’s not be irresponsible. Let’s start to take control of what we’re doing here. We still have a chance to take control of our economy by not electing stupid politicians, and I don’t care what level of politicians we’re talking about. Make sure they’re responsible. Make sure you know what you’re voting for. Don’t just vote for your pocket. You know, don’t just listen to the TV and decide who to vote, like really sit down and think from an economic perspective, you know, where the right place is to cast the vote, and maybe that’ll make a difference. Maybe it won’t, but at least it’s a chance. So, listen, that’s my spiel on Sri Lanka. I hope you find it valuable because I think it’s going to be happening in a lot of other countries.

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