The Pomp Podcast - #844 Russia Sanctions Lead To Long-Term Problems For The U.S.

Starting point is 00:00:00 what's up everyone this is anthony pompliano most of you know me as pomp you're listening to the pomp podcast simply the best podcast out there now let's kick this thing off today's episode is a breakdown of the russia ukraine situation the financial sanctions that have followed and what i think is a really important conversation around short-term versus long-term decision making i hope that you enjoyed this episode before we get into it i want to first talk about our sponsors. First up is LMAX Digital, the number one institutional crypto exchange. They offer clients the deepest pool of crypto liquidity on the planet, underscored by 100% uptime track record through volatility spikes. They leverage LMAX Group's liquidity relationships

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Starting point is 00:03:08 Venture to the forefront of crypto innovation and connect with OKEx DeFi today. Again, go check them out at OKX. That's where you can find OKX D5. All right, let's get into this episode. I hope you guys enjoy this one. informational purposes only. Good morning, everyone. Bang, bang. The Russia-Ukraine conflict continued to increase in intensity over the weekend. While the violent combat has been playing out on the ground, the United States and their allies have been busy waging economic war

Starting point is 00:03:56 against Vladimir Putin and Russia. There were a few key decisions made in the last 72 hours that got me thinking. We are watching a repeat of the conundrum that the Federal Reserve was in during the 2020 COVID crisis. First, let's go back in time and revisit what happened in 2020. During March of that year, the government recognized the severity of the pandemic and ordered government-mandated lockdowns across the country. This created a significant slowdown in the velocity of money, forced thousands of businesses to shut down, led to millions of people filing for unemployment each week, and financial markets saw the worst liquidity crisis since the global financial crisis. The Federal Reserve, in concert with their political colleagues,

Starting point is 00:04:35 made the quick decision to do two things. One, manipulate interest rates to 0%, and two, pump trillions of dollars into the financial system. There will be many books written about the efficacy of those decisions, including the size and scope. Regardless of where you come out on the impact of the monetary and fiscal decisions in 2020, it is clear that decision makers optimize for mitigating short-term pain over the long-term potential consequences. As you would expect, these short-term optimized decisions

Starting point is 00:05:03 led to significant long-term issues. We have inflation at the highest level it has been in 40 years, the wealth inequality gap is wider than it has ever been, unemployment is still higher than pre-pandemic, and financial markets swing with significant volatility. Was the short-term trade-off worth it? It is impossible to know. We will never be able to identify how bad the economic situation in 2020 would have become without the Fed and politicians' intervention. We do know how bad the long-term impact has been, though. Short-term optimization in the face of long-term, sound decision-making is a story as old as time. The United States is facing the exact

Starting point is 00:05:44 same situation again, this time with a geopolitical twist. Russia's invasion of Ukraine has forced the hand of NATO to respond. The consensus belief is that these countries will refrain from engaging in direct combat, but instead pursue economic sanctions against Putin, Russian banks, various Russian citizens, and the Central Bank of Russia. These hard-hitting measures are meant to inflict maximum pain on the country. It is important to remember that the leader of a country is almost never directly impacted by the financial sanctions levied, but rather the goal of the sanctions is to inflict pain on the citizens of Russia with the hopes that they will rise up and remove their leader. This is true of the sanctions targeting a variety of Russian oligarchs, but also of the

Starting point is 00:06:26 average citizen as well. When Russian banks or the country's central bank are sanctioned, the average citizen in Russia is who feels it most. They can't use the bank. They can't withdraw money. They can't send money to loved ones. It becomes incredibly difficult to purchase goods and services. The billionaires and oligarchs have their assets frozen or confiscated. The list goes on and on. This morning, the United States took these economic sanctions one step further and banned any U.S. citizen or company from conducting business with Russia's central bank. The only other time that the U.S. has ever pursued an action this severe has been in Iran, which has played out over the last decade or so. Now, I'm not an expert on geopolitics, nor am I an expert

Starting point is 00:07:09 on the economic impact of financial sanctions on NATO's adversaries. I know enough to be dangerous, but I don't want to waste our time regurgitating what you can read elsewhere. Instead, I think it is important to call out that the United States and NATO are making a very specific trade-off decision. Mitigate the short-term problem at the cost of a long-term problem. This is a repeat of the Federal Reserve's decision during 2020. The short-term risks vary from the invasion of Ukraine to all-out nuclear war. It makes sense why the United States and their allies are pursuing the economic sanctions to neutralize as much of these situations as possible. If you're going to err, it is better to err on the side of too aggressive here. But these actions don't come without

Starting point is 00:07:51 long-term consequences. Countries around the world have been officially put on notice. If you use the U.S. dollar system, the health and sovereignty of your financial system are solely dependent on keeping a good relationship with the United States. While most countries disagree with Russia's decision to invade Ukraine and are celebrating or participating in the financial sanctions, they will likely all start developing a plan to reduce dependence on the U.S. dollar system in the future. They understand that there is no resiliency without an insurance policy or a backup plan. Economist Steve Hank, who I normally disagree with on a lot, had a great tweet over the weekend where he said weaponizing the swift international payment system might cut

Starting point is 00:08:32 Russia off, but risks eroding the dollar-denominated global financial system. Indeed, it will give rise to alternative systems developed by China and Russia, just another example of why sanctions are counterproductive. Now, the historical options were to hold foreign currencies or gold, but that doesn't seem to be a viable plan for Russia as we are watching in real time. This leads me to believe that countries will choose to build swift equivalents outside the US dollar system. And for example, Russia claims they have one internally already. They'll also choose to set up non-USD accounts with various trading partners, and they'll begin to heavily investigate digital currencies. The Bitcoin community has obviously been saying for

Starting point is 00:09:13 years that countries will eventually adopt digital decentralized money. This may be true or it may not, but it isn't the only option. Take China as an example. The superpower will likely accelerate their plans for a digital renminbi or a central bank digital currency. The Chinese digital currency won't be decentralized, but it will operate on payment rails outside the US dollar system. It provides total control to the Chinese government and prevents any attempts by the US or NATO to sanction China financially. We haven't seen this type of system stress tested yet, but I think that that situation is coming in the next few years. We also shouldn't discount Bitcoin either. The decentralized currency is a neutral

Starting point is 00:09:57 technology that can be used by anyone, either friend or foe. While most people are talking about Russia potentially using Bitcoin to circumvent the sanctions, we saw the Ukrainian government post a Bitcoin address on Twitter and ask for donations to help fund their defense efforts. Consider the fact that millions of Ukrainian and Russian citizens are going to want to move geographically because of this conflict, and it becomes obvious that Bitcoin would be the superior way to take their economic wealth with them. There are no winners in war. The United States and NATO are being forced to respond to the invasion of a sovereign nation by a nuclear-armed country that happens to be one of the largest energy producers in the world. The geopolitical

Starting point is 00:10:36 chess that is unfolding is hard to keep up with. It is nearly impossible to know which decisions are right and which are wrong. Eventually, we'll be able to evaluate the efficacy with the benefit of hindsight, but we aren't afforded that luxury today. One thing is clear, though. The United States and their partners are making decisions to mitigate short-term risk, but it will come at the expense of long-term problems. Maybe we can address the long-term problems later, or maybe not. It is unfair to play Monday morning quarterback, so we must simply be aware of the trade-off we are pursuing, and then work to make the best of the situation. I'll continue to spend time learning about this situation and thinking through the various implications. If you have any ideas or

Starting point is 00:11:16 insights or knowledge to share, please share them with me on Twitter or through the newsletter by just simply responding to the email. Hope each of you has a great start to your day, and I'll talk to you tomorrow. Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to palmscryptocourse.com. We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to palmscryptocourse.com to learn more, and I'll meet you guys

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The Pomp Podcast - #844 Russia Sanctions Lead To Long-Term Problems For The U.S.

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