The central bank plays a key role in every economy; managing the national currency. It controls the currency flow by either injecting or withdrawing funds from the economy. All of the money in circulation is printed by the central banks.

Yet, there is talk that the bankruptcy of central banks is possibly going to happen. Peter Thiel, a renowned investor who is the founder and chairman of <a href="https://www.palantir.com/">Palantir Technologies inc</a>, sees it happening sooner than later. And that will most probably bring the adoption of Bitcoin sooner than expected. So just how can a central bank go bankrupt? Read on to find out.
<h2>Brief on How the Central Bank Works</h2>
Before printing any currency, the <a href="https://www.cryptoknowmics.com/news/russias-central-bank-all-set-to-test-digital-ruble/">central bank</a> must have a set intended <a href="https://www.cryptoknowmics.com/news/jamaica-to-airdrop-jam-dex-cbdc-to-early-adopters-of-cbdc-wallet/">target</a> cause of action within the economy. The most common aim is usually to either reduce or induce inflation. Another important aim is usually to devalue the currency, maintain its current valuation or increase its value. 

There are two key options to affect the two primary variables: raising and lowering interest rates. Such a step reduces or increases the money supply respectively by affecting the cost of borrowing.

The second option is <a href="https://www.cryptoknowmics.com/news/biden-administration-to-release-executive-order-on-crypto-next-month/">quantitative easing</a>. It involves directly injecting money into the economy through the purchase of bank securities. This money is made simply. The reverse consists in selling government securities to the banks to reduce the money supply.
<h2>Where the Problem Begins</h2>
The problem now arises from such expansionary monetary policies. Central banks have been carrying out very aggressive financial policies with detrimental effects on the economy. 
<h3>1) Too Much Local Currency Chasing Too Few Dollars</h3>
To begin with, the massive money printouts by the central banks are causing immense depreciation pressures on their currencies. The key reason is that the balance between the supply of local currencies and dollars is altered. Too many local currencies start chasing too few dollars in their reserves. 

The result is that the banks are forced to burn through their forex reserves to maintain the current exchange rate of their currency. Central banks end up having less and fewer <a href="https://www.investopedia.com/terms/f/foreign-exchange-reserves.asp">forex reserves</a> under such scenarios. Failure to do so, the local currency will depreciate, making the costs of goods go up considerably. 
<h3>2) Expanded Money is Going to Non-GDP Expenditures</h3>
The government can encourage the spending of the expanded money supply into activities such as agricultural production or manufacturing expansion. Investment in needed infrastructure has a similar effect.

The problem is most of this funding is channeled to expenditures that don't boost a country's GDP. Such costs include stock or real estate speculation. The government ends up being more dollar strapped since exports aren't increasing. Exports play a crucial role in increasing the foreign exchange earnings, always being in the much-needed dollars.
<h3>3) Increased Creation of Market Bubbles</h3>
An even more worrying norm has been the central bank funded but stock market induced market bubbles. The great <a href="https://www.investopedia.com/terms/g/great-recession.asp">2008 economic recession</a> is a good example.

It occurs when too much money goes to unregulated speculative spending. From 2004 to 2008, the US Federal bank carried out massive quantitative easing strategies to try and boost the economy. However, the funds were used by commercial banks to fund corporate <a href="https://www.investopedia.com/ask/answers/042015/why-would-company-buyback-its-own-shares.asp">stock buy-backs</a> and try to speculate on <a href="https://www.investopedia.com/terms/c/creditdefaultswap.asp">credit swap derivatives</a>.

These derivatives were very lucrative in terms of returns and were sold to massive institutions and investors worldwide. They, however, had very high risks, covering investments such as sub-prime mortgages that are issued to risky borrowers. It created a massive economic bubble in the US and several major European economies like the UK and Germany.

When defaults on lending eventually happened, the bubbles burst and the economies crashed. Central banks across the world were forced to invest trillions of US dollars towards stabilizing the global economy and their currencies. Many central banks of major economies such as Greece and Italy became cash strapped, with the formed defaulting on loan obligations. 

The same pattern of speculative spending and bubble creation seems to be happening currently, putting central banks at risk of bankruptcy. The Srilankan central bank has already gone bankrupt.
<h3>4) Bitcoin and Crypto are Possible Saviours</h3>
As per Peter Thiel's inference, Bitcoin and crypto are the most probable solution to the issue. Their decentralized nature means that there is no single party that controls the money supply. The amount of currency in circulation is determined chiefly by forces of <a href="https://www.cryptoknowmics.com/news/vietnam-government-creates-framework-to-legalize-cryptocurrency/">demand and supply</a>.

Since earning a bitcoin by a company must come through the sale of goods and services or costly loans, speculative expenditures could reduce. Companies will no longer borrow to fund corporate buybacks or speculate on credit derivatives.

In addition, the banks will increasingly lend to productive activities that improve the GDP. Central banks will go out of their way to ensure that. Only then can a country increase its reserve assets supply and thus improve its ability to weather economic storms.
<h2>Wrapping Up!</h2>
The central banks are currently trending on a challenging path. Peter Thiel's analysis seems spot on since a central bank of an upper-middle-income country has already declared bankruptcy.

Bitcoin stands as a good possible solution to such issues. Its <a href="https://www.nytimes.com/2021/09/07/world/americas/el-salvador-bitcoin.html">adoption by El Salvador</a> appears to have greatly reduced their Central bank's financial problems. It may be wise for more countries to improve Bitcoin adoption rates within their borders. However, more feasibility studies must be carried out on how other important central bank functions will be affected.

Imminent Central Bank Bankruptcy Could Bring Bitcoin Adoption Sooner as per Peter Thiel

Adam is an outgoing young lad who likes adventures and discovering new things.Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.

Imminent Central Bank Bankruptcy Could Bring Bitcoin Adoption Sooner as per Peter Thiel

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