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Broke WorldYes, it sounds like the title of a cheap low-budget movie, alas it is not. We are deadly serious. As you may remember (probably not), in our article Solving Country Defaults Through Printing, we stumbled across a debt limit (the Default Point) which empirically indicates a debt level at which countries seem to begin to default. This number expressed as Debt over Real GDP is about 1500%. This discovery spawned a few numeric projects, including the DI, the DVI and the ESSI.

At some point we asked ourselves, if we would to consider the world as a country, where would we be?

MAINSTREAM ECONOMICS

To answer this question, we first looked at the problem as classic, mainstream economists would look at it, this is, Debt as percentage of GDP. Borrowing the data from the Central Bank of Canada from its "New Database of Sovereign Defaults", we plotted the following graph:

World Debt as Percentage of GDP

As you can see, the picture is not a pretty one. The blue line is the World Debt as % of World GDP. The red line is a linear trend which provides us with a better picture since it ignores the ups and downs (what in statistics is called "noise"). It is fast approaching 100%. This is terrible!

But, wait. Is it?

Let's thinks as a mainstream economist. What does it mean that the world debt is reaching 100% GDP if the interest rate on the debt is in the order of 5 to 10% of it? Not much. Sure, people will suffer, governments will go into "emergency" and "balanced" and "stringent" and "special" budgets where they will cut some expenditures and the party will keep going and going and going (as an old advert for batteries used to proclaim). For how long? We don't know. But don't you worry because the government is here to solve all problems through magic printing.

COMMON SENSE ECONOMICS

If we now plot the same data, but processed as per our DI project, the picture is vastly different (no surprise here); see below.

World Debt as Percentage of Real GDP

The colors have the same meaning as in the previous picture, with one exception. The trend line that best represents the data is not a linear one, but an exponential one. And this changes things dramatically.

As you can see this trend line "climbs" much, much faster than the previous one; this being the primary difference between a linear and an exponential equation.

If we now extrapolate (i.e. extend) this trend line into the future until it hits the magic 1500% (the Default Point), we can then see at which year would this occur. The forecasted year is 2026, or a mere 11 and 1/2 years from now.

What this forecast is telling us is that in about 12 years the entire world is going to go to hell in a hand basket, so to speak. Or more precisely, that as the world approaches this debt level, its probability of default begins to become a certainty.

Although it is true that this magic limit of 1500% is not written in stone and bullet proof, it is also true that any normal human being (this excludes politicians) would want to stay as away as possible and not rushing towards it!

This extrapolation does not mean that in exactly 11 and 1/2 years the world will be bankrupt; it may happen before or it may happen later. What this extrapolation is telling us, is that time is indeed running short and the world is heading towards the biggest catastrophe in human history at full speed.

What this extrapolation is telling us is that mainstream economic forecasts are not worth the electrons spent making them. Let's be clear: mainstream economists have no clue whatsoever and they are dragging you down with them.

Note: as an astute and observer reader you may have noticed that the last section of the plot (2010 to 2013) is going down. Wouldn't this indicate that we are OK? That the danger has been averted? Not at all. The 2010 to 2013 data is simply incredibilis (from the latin "not credible"). Considering that up to 2010 countries have been taking debt to "resolve" the 2008 hicc-up and the currently that debt has not been paid yet, while they continue to take more; and that the global economy is slowing down, how is it possible that the situation is improving? Well, actually we strongly suspect that it is not. Those are all government numbers and we know that governments never lie, right?

THINKING THE UNTHINKABLE
Are we forecasting the end of the world as we know it? We are. Truly? Yes.

If you are not scared yet, you should be.

Imagine all the bad things that Central Bankers told us that could have happened in 2008 and did not, and now imagine them as simple preludes to the final debacle… at the world-wide level.

All economies frozen at any level in any country.

All electronic transactions dead.

All paper cash worthless.

All goods and services necessary to sustain basic life, gone.

A true survivalist scenario. Guns, bread and shelter. Survival of the prepared.

And the rest?

Well… don't be one of them.

This is truly what the world is facing. Forget avian flu. Forget killer meteorites. Forget nuclear war. They are nothing compared with the devastation that a global economic meltdown will cause.
Almost all people in all cities will be dead of starvation within a few months. This means 60% of the world population will be wiped out in a very short time.

There will be no hiding place, no refuge, no asylum, no survival heaven.

Scared enough? You should be.

THE INEVITABLE
But is it really, truly inevitable?

Luckily, no.

This scenario that we painted is linear history, which seldom happens. This scenario assumes that all things will remain the same… which never do.

The problem is that just because things change, this does not mean that they will change for the best. They might, or they might not.

It is even possible that the very stupidity that is driving us through this path to oblivion may end up saving us. If sufficient countries collapse and if we have sufficient 2008's and worse (but not a global meltdown), people may suddenly evolve and demand that governments, all governments, get out of the business of manipulating markets.

It can happen… but if our standard model of economic collapse (Argentina) is correct, it won't.

CONCLUSION

And now what?

Should you run for the hills, build a bunker and hide?

Who knows. We don't pretend to know. All we know is that the current picture looks bleak indeed, people are clueless and politicians don't care. Not a good mix.

But at least you have been warned, at least you have some time to monitor and plan, at least you are waaaaaaaay ahead of everybody else.

Believe us or not but at least keep monitoring the situation. We will too.

Note: please see the Glossary if you are unfamiliar with certain words.

 

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