Sri Lanka
Nothing is permanent, not even countries
In the infamous movie American Psycho (2000), there’s this scene where main character Patrick Bateman gives a passionate speech about how there’s atrocity left and right, everywhere we look, and that maybe we shouldn’t be hyper-focused on the catastrophes of a single country, or nation.
Come on, Bryce, there’s a lot more problems than Sri Lanka to worry about.
How thought-provoking. While Patrick lists a valid number of global issues and problems, some that we’re still collectively struggling with today, we should maybe give Sri Lanka a second look and see what’s going on in the country, right now…
While much of Western media has been fixated on the Ukraine-Russia conflict, the rest of the world has still kept chugging along. Much of our collective mental bandwidth has been rightfully focused on the ongoing terrors and atrocities of war in Eastern Europe, but I also think Sri Lanka merits a double-click. What exactly is happening in this small island country south of India, and how might it serve as a warning for other countries, no matter how “developed or undeveloped”?
Build Up
Sri Lanka’s crisis seemingly began brewing with explicit indicators of symptoms in 2019. From Wikipedia,
The Sri Lankan economic crisis is an ongoing crisis in the island-state of Sri Lanka that started in 2019. It is the country's worst economic crisis since its independence in 1948. It has led to unprecedented levels of inflation, near-depletion of foreign exchange reserves, shortages of medical supplies and an increase in prices of basic commodities. The crisis is said to have begun due to multiple compounding factors like money creation, a nationwide policy to shift to organic or biological farming, the Easter bombings in 2019, and the impact of the COVID-19 pandemic. The subsequent economic hardships resulted in the 2022 Sri Lankan protests.
…
Sri Lanka had been earmarked for sovereign default, as the remaining foreign exchange reserves of US $1.9 billion as of March 2022 would not be sufficient to pay the country's foreign debt obligations for 2022, with US $4 billion to be repaid. An International Sovereign Bond repayment of US $1 billion is also due to be paid by the government in July 2022. Bloomberg reported that Sri Lanka had a total of US $8.6 billion in repayments due in 2022, including both local debt and foreign debt. In April 2022, the Sri Lankan government announced that it was defaulting, making it the first sovereign default in Sri Lankan history since its independence in 1948 and the first state in the Asia-Pacific region to enter sovereign default in the 21st century.
In June 2022, Prime Minister Ranil Wickremesinghe said in parliament that the economy had collapsed, leaving it unable to pay for essentials.
Within just the span of about 3 years, Sri Lanka went from doing reasonably okay as a developing country, towards what might unfold as total collapse, a humanitarian crises affecting millions of people, and secondary or tertiary effects on other countries and economies that will also have to absorb the hit. Like the ongoing Ukraine conflict, the ramifications for what is happening in Sri Lanka right now, will unfold for years, possibly decades to come.
Permanence
If like most people, you and your family have spent years or even generations living in a given country, nation, state, or neighborhood, there’s this perceived permanence about the state of things around you. Your sources of water, food, places to shop, favorite landmarks, and the people in your life — all bring a sense of comfort, familiarity, and the illusory veil that what there is, is all that has been, and all that will ever be. This gut feeling might resonate with what is described as feeling at home.
Many of us in these “developed” countries, like those in the West, aren’t personally familiar with the ongoing atrocities facing countries like Ukraine, Sri Lanka, and other countries. We may have the privilege of never having personally been affected by war, displacement, famine, or extreme poverty. But just because we haven’t experienced these things in our lifetime, doesn’t mean we aren’t immune to such systemic failures in the short-term, or long-term future.
We have this privileged, perceived assumption that conflict-induced countries have this unique and complex political history, internal corruption, religious conflict, and ideological heterogeneity within the populace. These things must be the reason why the government collapsed … Therefore, such atrocities and systemic failures couldn’t happen to us in the West! … Right??
Except, every country struggles with these problems to varying degrees, and no country, nation, or group in the history of humanity has been immune to fall. It’s not a matter of if nations fall, but when.
Cascading Tails
There’s this idea of Black Swan events. These situations are the outcome of the extreme impact of rare and unpredictable outlier events—and as humans, we have the tendency to find simplistic explanations for these events, after they have already happened. Almost all swans you will encounter in your life are white, but that doesn’t deny the possibility of the existence of a black swan.
Just because you haven’t encountered a black swan in your life, doesn’t mean it doesn’t exist, or that it will continue to “not happen” in the future. Another way of putting it, the absence of evidence is not the evidence of absence. As the saying goes, hindsight is 20/20. Yet, none of us would have predicted what was going to happen in the year 2020. Well…
Nassim Taleb, the author who coined the term and wrote The Black Swan, was interviewed in early 2020 about COVID-19 with The New Yorker:
Nassim Nicholas Taleb is “irritated,” he told Bloomberg Television on March 31st, whenever the coronavirus pandemic is referred to as a “black swan,” the term he coined for an unpredictable, rare, catastrophic event, in his best-selling 2007 book of that title. “The Black Swan” was meant to explain why, in a networked world, we need to change business practices and social norms—not, as he recently told me, to provide “a cliché for any bad thing that surprises us.” Besides, the pandemic was wholly predictable—he, like Bill Gates, Laurie Garrett, and others, had predicted it—a white swan if ever there was one. “We issued our warning that, effectively, you should kill it in the egg,” Taleb told Bloomberg. Governments “did not want to spend pennies in January; now they are going to spend trillions.”
The warning that he referred to appeared in a January 26th [2020] paper that he co-authored with Joseph Norman and Yaneer Bar-Yam, when the virus was still mainly confined to China. The paper cautions that, owing to “increased connectivity,” the spread will be “nonlinear”—two key contributors to Taleb’s anxiety. For statisticians, “nonlinearity” describes events very much like a pandemic: an output disproportionate to known inputs (the structure and growth of pathogens, say), owing to both unknown and unknowable inputs (their incubation periods in humans, or random mutations), or eccentric interaction among various inputs (wet markets and airplane travel), or exponential growth (from networked human contact), or all three.
While the COVID pandemic itself might not have been a black swan event, it was certainly a tail event (rare white swan). Meaning, it wasn’t completely unforeseeable like a real black swan, but it was still a generally unlikely event to unfold (we don’t get pandemics every day like we get car accidents, which are also rare, but not nearly as rare). Seemingly, we get a pandemic every ~100 or so years. Car accidents are unfortunately a bit more frequent. Both are rare and somewhat predictable, but different orders of magnitude rare.
However, the thing about tail events is that they have the potential to cascade probabilities and increase the chances of other tail (rare) events, or true black swan events (events that nobody saw coming). Some examples, the COVID pandemic’s global spread, as a white swan event, highlighted weaknesses in:
Collective health: Obese individuals from obese countries suffered from more severe COVID infections, because higher body weight is associated with increased rates of all-cause mortality. Thus, those who got COVID and were obese, were more likely to contract a serious infection and possibly die from it
Healthcare system: How quickly were some hospitals and healthcare systems overloaded? What actions did local, state, and national governments take to reduce hospital constraints? How fast did they respond? How likely were local citizens to follow masking and social distancing orders?
Financial system: How much money was being printed, due to everyone staying at home? Where was that money allocated? How many businesses closed forever? How did that money printing affect the banking system, interest rates, and inflation?
Supply chains: When many of us stopped working, how were grocery store shelves still being stocked? Essential medicines? What became harder to obtain?
A clear example of unintended consequences was the recent baby formula shortage in the United States. Nobody would have predicted a few years ago that a virus out of Wuhan, China would have an indirect effect on the domestic supply chain production of baby formula two years later, in a first-world country like America.
The point with these events is to illustrate how micro-systems (e.g., local masking compliance) and macro systems (e.g., the monetary value of your country’s currency) were significantly tested during the pandemic. Vulnerabilities emerged. Some systems were able to bear the brunt of COVID’s surprise, while others were permanently damaged and will likely not survive the emerging post-COVID world. Sri Lanka was only a recent example of a country that fell under the added pressures from the pandemic, but unfortunately, I don’t believe it is the only example.
So far, we’ve hopefully established that:
a) What happened in Sri Lanka was not a one-off, or sudden/rare event
b) Many of us in the developed world believe that peacetime is long-term stable, and short-term volatile (the opposite is true)
c) Rare events test existing systems in previously untestable ways, and newly exposed weaknesses in these systems increase the chance of seeing more rare (white swans), or highly unlikely/unpredicted events (black swans)
Tear Down
Fiat money is backed by men with guns - Paul Krugmen
So how exactly does a nation go from rise, to fall? When do we know it’s “over”? What can we do about it, on an individual level? I don’t have the answers, and I doubt you’ll find them reading any one substack article. This Ray Dalio book summary video is enlightening (if you click just one link from this article, click this one). The deflated answer I can give is, it’s complicated. History has shown us that different nations fall for different reasons, but they all do fall eventually. At least in the present era, behind every modern-day country is a modern fiat currency, and the US Dollar holds the #1 spot as the current global reserve currency of all fiat currencies.
Defined, fiat money, or a fiat currency is:
A government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
The website WTF Happened in 1971? shows dozens of charts based on US data, highlighting a sudden and marked change in trends for everything from annual number of Physics PhD graduates, to changing trends in meat consumption. After 1971, real wages went flat. American gold reserves plummeted. Currencies crashed. Frequency of global banking crises increased. Federal debt went through the roof. Everywhere you look, things changed, and are seemingly trending in a worse direction. But what exactly did happen in 1971?
Before the US Dollar was backed by nothing, as it is today (see above), it was backed by the Gold Standard [from Investopedia]:
The Federal Reserve Act of 1913 created the Federal Reserve Bank to respond to the unreliability and instability of a currency system that was previously based on banknotes issued by individual banks. This was the same time that the U.S. economy became the world’s largest, surpassing that of the United Kingdom. World commerce still centered around the U.K., though, as the majority of transactions took place in British pounds.
The majority of developed countries pegged their currencies to gold as a way to stabilize currency exchanges. But when World War I broke out in 1914, many countries suspended their use of the gold standard to pay their military expenses with paper money, which devalued their currencies. Britain, though, held to the gold standard to maintain its position as the world’s leading currency and found itself borrowing money for the first time during the third year of the war.
The United States became the lender of choice for many countries that wanted to buy dollar-denominated U.S. bonds. Britain finally abandoned the gold standard in 1931, which decimated the bank accounts of international merchants who traded in pounds. By then, the dollar replaced the pound as the leading international reserve currency.
This gave rise to something called The Bretton Woods Agreement:
As it did in World War I, the U.S. entered World War II well after combat began. Before it entered the war, the United States served as the Allies’ main supplier of weapons and other goods. Most countries paid in gold making the U.S. the owner of the majority of the world's gold by the end of the war. This made a return to the gold standard impossible by the countries that depleted their reserves.
Delegates from 44 Allied countries met in Bretton Wood, New Hampshire, in 1944 to come up with a system to manage foreign exchange that would not disadvantage any country. The delegation decided that the world’s currencies would no longer be linked to gold but could be pegged to the U.S. [Dollar] That's because the greenback was, itself, linked to gold.
The arrangement came to be known as the Bretton Woods Agreement. It established the authority of central banks, which would maintain fixed exchange rates between their currencies and the dollar. In turn, the United States would redeem U.S. dollars for gold on demand. Countries had some degree of control over currencies in situations wherein the values of their own currencies became too weak or too strong relative to the dollar. They could buy or sell their currency to regulate the money supply.
In 1971, President Nixon took the bold step of removing the United States from the Gold Standard, thereby de-pegging the stability of the US Dollar in exchange for gold. This video by One Minute Economics explains the phenomenon:
Oh — and here’s President Nixon’s original speech, made in August 1971:
In short, the US Dollar’s trust, which was backed by a desirable rare earth metal, was now backed solely by “American trust”. The fundamental commodity that was backing the US Dollar was gone, and nothing has replaced it since. Except, from a global perspective, the meaning behind the words “American”, “trust”, and “American trust”, have changed since 1971…
From Nixon’s speech: “If you are of the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow, as it is today”.
Nixon essentially wanted the American Dollar to be backed by American labour and goods, and not something that was manipulable by other countries like France, which at the time would buy large sums of gold from America and risk the possibility of the American economy tanking, as their gold reserves began shrinking. In the short-term, this move was framed as American patriotism, with heightened consideration for the national defense of the US gold reserves, against threats in international markets.
Flash forward to today. There’s a problem. What is American-made these days? Take a minute to look around your room and see if you can find that sticker of origin. Likely, the chair you’re sitting on, the electronic device you’re using, and the clothes on your back, were all made outside the North American continent. The power of the dollar has been outsourced to globalization, and that’s scary for something that has just been backed by “trust” for the last 50+ years, since 1971.
Am I insinuating that America, and other developed nations are headed towards total collapse? I can’t predict the future and definitely don’t believe Western nations are going to just disappear tomorrow. Nor am I making any absolute doomsday predictions about individual countries. What I am saying, is that at present in 2022, there seems to be a non-zero chance that America’s peak is behind itself, and the country has been nose-diving towards steep decline since 1971.
With the potential collapse of the United States, comes the collapse of the US Dollar, and the end of its reign as the global financial reserve currency. In a globally inter-connected world like today, where a local virus can affect global supply chains, such a cascading tail event would be so catastrophic, that it would eliminate entire countries and economies dependent on the US Dollar for their own financial reserves. This hypothetical scenario could easily supersede World War I & II in total global death count, displacement, and human catastrophe.
Perhaps for these reasons, it is worth looking at Sri Lanka again. Not just with anxious, darting eyes and a false belief of indefinite peace, but perhaps also with a sense of determinate optimism about our collective fate. While Sri Lanka was not in the best financial, economic, and political position in the pre-COVID world, tail events will inevitably continue to occur in the future. If we’re really unlucky, we could even get hit with a real black swan event.
Like Sri Lanka, such an event could just be powerful enough to destabilize major Western countries and superpowers like the US, Canada, France, India, Israel, Australia, or the UK. These are the same countries that are known for providing humanitarian aid in times of crisis for other countries. But who saves the saviours?
Country 2.0 — The Network State
This next part isn’t entirely the answer to the problems of fiat currency and the changing world order, but its something that has recently caught my attention. This sounds a lot like science fiction at this point, and it is possible that some, or none of what is written below will ever come true. Still, I see it as an interesting experiment, and attempt at a potential solution.
On America’s Independence day, July 4th 2022, the book The Network State was released. This book is a bold vision on how to start a new country — and form a sort of exit from the limited, present-day options of emigrating from a declining country, just to immigrate to another fiat-based one. The book is freely available online, and likely to get ongoing updates as an emerging thesis for something as bold and daring as starting a new country.
Described, The Network State in One Sentence:
A network state is a highly aligned online community with a capacity for collective action that crowdfunds territory around the world and eventually gains diplomatic recognition from pre-existing states.
When we think of a nation state, we immediately think of the lands, but when we think of a network state, we should instantly think of the minds. That is, if the nation state system starts with the map of the globe and assigns each patch of land to a single state, the network state system starts with the 7+ billion humans of the world and attracts each mind to one or more networks.
Here’s a more complex definition that extends that concept and preemptively covers many edge cases:
A network state is a social network with a moral innovation, a sense of national consciousness, a recognized founder, a capacity for collective action, an in-person level of civility, an integrated cryptocurrency, a consensual government limited by a social smart contract, an archipelago of crowdfunded physical territories, a virtual capital, and an on-chain census that proves a large enough population, income, and real-estate footprint to attain a measure of diplomatic recognition.
Balaji Srinivasan (author of the book) paints a bold deconstruction of the key elements that constitute some of the axioms of power behind a sovereign country, while maintaining that a network state can exist offline, and in a decentralized manner. Through this deconstruction, he suggests that modern tools and technologies will soon be available to help facilitate the formation of powerful networks of coordinated individuals, towards building something with a unified vision and congruent moral values. In this sense, governments and rulers are selected for competence, not inheritance, in an emergent and organic manner. Digital nomads and displaced citizens seeking an exit from their existing country, degrading fiat currency, and certain laws that individuals might not fully align with, will hopefully get to chose their new government, accepted laws, and people that make up their communities (both online and offline). This has powerful ramifications for how we may live, mingle, an allocate resources in the future. There’s a possibility here that countries and network states co-exist in a transitionary period, and ultimately in the long run, countries might have to compete for top talent and citizens, against decentralized network states. Right now, there are 23+ startup societies being tracked by The Network State project, and these early proofs of concept may lay the groundwork for a new way of being, governing, connecting, earning, and living.
A more thorough review of the book, some food for thought, and a healthy dose of skepticism and constructive criticism, can be found on Vitalik Buterin’s blog post about the book, here. A fantastic podcast that expands on the ideas, with Balaji himself, can be found here.
I agree with a lot of what Vitalik’s review says, and so instead of re-hashing it out here, you get a clearer sense of the thesis of the book, and Vitalik’s noted skepticism and commentary on his own vision for the future, much of which I find myself aligning with. The podcast is also an enlightening listen for those new to concepts like decentralization and blockchain technology, and ties the whole thesis together in a more digestible, audible format.
While Sri Lanka joins Ukraine as a country undergoing unprecedented catastrophe, we can look at these countries as not one-off examples of something gone horribly wrong. Instead, we can look at Sri Lanka as the build up of many years of international political tension, hidden vulnerabilities, mounting corruption, and the inability of inherited leaders of institutions to pivot in times of existential threats to the status quo — the way things were.
Of course, with hidden tailed risks, the root causes of these problems are multi-faceted and near impossible to pinpoint. Smaller hidden risks slowly compound in the background, until one day a major event sets things in motion. The problem becomes too big to fix, and the status quo — the country and its governing bodies, fails to adapt to the threat. It’s like how a child might get away with eating candy and not flossing their teeth for some time, and eventually a visit to the dentist reveals hidden cavities and serious tooth decay that was otherwise not visible to the naked eye, until it was too late.
The post-9/11 world brought a disdain for security theatre and flying internationally. The post-2008 world brought a lack of trust in major banks, fiscal stimulus programs, and government intervention. The post-COVID world is continuing to test and break our assumptions about global supply chains, bio-defense strategies, human coordination, trust in institutions, and the ongoing monetary stimulus decisions made by central bankers. With each passing event in the future, humanity might need a new form of exit, and that exit might just be found in the formation of organic digital networks (eventually forming offline), aligned incentives, open-source funding protocols, coordinated effort, and the emergence of multiple competing, decentralized, network states.
