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Central Bank At WorkDear reader. This is our last post. That's it. We call it quits. Goodbye. We were mistaken and we found proof. Keynesians and Monetarists got it all right and we were wrong. Concomitantly and as promised, from now on we will support Central Banks and all politicians that work so hard to benefit humanity.

Finally! We have the technology and the data. We can reconstruct the truth. The gentile folks at the Bank of Canada had compiled it and we can use Excel (from the evil, evil Microsoft) to show you all about it. So, let's begin.

The Central Bank of Canada has compiled what they call their "New Database of Sovereign Defaults" and have made this data available to the public. Mind you, it's just a spreadsheet, but still, very worth your time.

Note: Should the data and its report be removed, we have posted copies of both at the bottom of this article.

What interests us the most is what is called "sovereign defaults"; this is, countries going bankrupt to the tune of Giga USD (or billions for you, yanks). This data is crucial because the amount of debt that causes defaults can only be generated by fiat money. We are not talking peanuts here; only Central Banks can provide this kind of liquidity. Therefore, if there is some sort of trend, of any kind, we should be able to extract a valuable lesson that will settle once and for all the Monetarists vs. Austrians dilemma.

It's quite simple. If debts do not cause defaults, this means that printing fiat money is actually good. If we see the contrary, then printing money is bad. To the graphs!

World Defaults as Percentage of World GDP

This first graph does not bode well for Austrians. As you can see, it depicts the amount of defaulted debt as a percentage of the world GDP. If you notice the numbers, you will see that they are quite low. The average percentage is in the order of 0.7% which is exceedingly low. Consider this. If your salary is 1000 EUR per month, 0.7 would be 70 EUR of defaulted debt. This is nothing, a pittance, really. Furthermore, we see that defaults peaked around 1988, which would seem to indicate that after 1998 Central Banks learned how to manage the production of fiat money to avoid defaults. In addition, since this data extends almost through 35 years, it most certainly can't be a glitch. We have to believe it.

Is Austrian economics doomed? It would seem so.

But, suspicious that we are, we wanted confirmation. Perhaps there is something wrong with the GDP. Let's add the GDP to the graph.

World Defaults as Percentage of World GDP

Well, other than we having to scale the % Defaults to fit them in the graph, everything seems OK. The trend line indicates that the peak of defaults happened around 1987 and it has been dropping ever since. More damming evidence. How could we have been so wrong? There must be a problem somewhere. Let's look at the problem in a different way. Let's plot the number of sovereign countries that defaulted versus the GDP.

Sovereign Defaults vs. GDP

Well, not much difference here (other than we having to scale the number of defaulting countries to fit them in the graph), the maximum of defaults happened around 1997 according to the trend line. But since 1997, everything is going OK. The GDP is growing but the number of defaulting countries is dropping. We are doomed, we tell you dear reader, doomed!

Well, it was a good fight… but before we go and just as a sporting event, let's add one more piece of data. Let's add total World Debt.

World Defaults as Percentage of World GDP

Humm… how strange. The World GDP and the World Data seem to have almost parallel lines. Furthermore, as debt increases, the amount of defaulted money decreases? What??? What is going on???

Hold on. Stop the doom and gloom. Cancel the cancellation. We smell a rat; or more precisely, a Central Bank rat.

How is it possible that as debt increases in parallel with the GDP, the number of defaults decreases???

Consider this. You and your neighborhood all earn wages. In addition to your wages, you all borrow. First, you borrow from your credit cards. Once these are maxed out, you borrow from your line of credit. When this is gone, you add another mortgage to your house… and a third one. Once no bank will lend you a cent, you borrow from your relatives, friends and finally a loan shark. You and your neighborhood continue to do this for over 25 years yet the number of personal bankruptcies keeps going down and down! NOT POSSIBLE!

In addition, if we compare the second and the third graph, there is a glaring discrepancy. In the first one, Peak Debt occurs around 1987 while in the second around 1997. Why the discrepancy? Why the 10 years discrepancy? If Central Banks have indeed learned how to prevent (or at least minimize defaults), why is that both graphs disagree by so much? Control should have happened by roughly the same time regardless of the analyzed data, yet, this is not the case.

We have the correct data; it's just that we are not seeing it under the proper light. Let's see if we can clarify what's going on.

World Defaults as Percentage of Real World GDP

Ahhhh!!! Much, much better.

Let us walk you through. In the same manner as an accountant will tell you that your net worth equals all your assets minus all your liabilities, the world net worth equals its GDP minus its Debts. This is so because the GDP includes all government spending… which is mainly obtained from debt. So, if we want to have an approximate idea of how much real wealth we have in the world, we need to subtract one from the other. This number we call Real GDP and it is represented by the Blue line in the graph above.

Then, we take the World Defaults (in currency) and we expressed them as percentages of Real GDP. This would be the red line in the graph above.

What we are doing here is simply take your neighborhood, calculate its net worth and express the amounts of personal bankruptcies as a percentage of this worth. This makes sense because the wealthier a neighborhood is, the lower the bankruptcies there should be. This is simple common sense. In general terms, rich people has a much lower probability to go broke than the middle class or the poor people (who live in bankruptcy). Let's see if this is true.

Well… what do you know; it is!

Take a second look at the graph and you will notice some remarkable "coincidences". Every time the Real GDP rises (i.e. real wealth increases), the percentage of defaults decreases. When the Real GDP decreases, the percentage of defaults increases.

Of course, these coincidences are not exact, but they are remarkably close. Actually too close to be coincidence (we could swamp you with statistics, but trust us, this is no coincidence by any reasonable statistical measure).


Consider this. What's the difference between GDP and Real GDP? Debt. And where does this debt come from? Fiat money. Therefore we can look at the same graph in a different light. Every time that Real GDP drops it means that Debt goes up, which means that fiat printing just went up. And what happens when printing goes up? Defaults go up!

In other words, when Central Banks begin to print and create money out of thin air, defaults soon follow. This is clear and it is not glitch. This trend is there for the last 35 years. This cannot simply be ignored or dismissed.

Furthermore, this graph reveals that there is no such decrease in defaults. Defaults are oscillating around the 1500% (no, this is not math error) Default mark. There is NO decreasing trend. Central Banks DID NOT learn how to manage the printing of fiat money to prevent defaults. All the previous graphs were mirages produced by faulty calculations (such as the GDP).

The world is NOT getting better.

Oh, and one more thing. Remember that 1500% we mentioned before? Allow us to place it into perspective. Suppose you earn 1000 AUD per year. Then you borrow. Then you borrow some more. And some more. And some more. If you were an average country, you would not go bankrupt until you owe 15.000 AUD!!!. This does not seem that bad, but if you consider that under normal conditions, banks deem a mortgage to be affordable if the real estate costs anywhere between 2 to 5 times your yearly income. In other words, if your yearly salary would be 1000 AUD, the biggest house you would be able to purchase would be around 5000 AUD. Yet, somehow, countries do not go broke until they reach the 15.000 AUD mark!

This number, 1500%, right there, tells you a grim story. Recall from the first graph, that this number was in the order of 0.7% , but things change remarkably when you look at data under the correct light. Since about 1980, countries that reach astronomic debts in the order of 15 times their Real GDP go broke. This number, 15, is not crazy, it is outright insane!

Note: and what about the data for 2012 and 2013? Is this an anomaly? Honestly, we don't know, but we suspect that something is very wrong. Considering that since 2011 Central Banks have been printing like drunken printers, it is virtually impossible that the Real GDP would have gotten that high. We are convinced that in a few years' time, when the final data is in, this "anomaly" will disappear.


Of course! Keynesian and Monetarists are mistaken. No, scratch that. They are totally, utterly, completely, absolutely and irrevocably bonkers. The whole theory is garbage, plain and simple. Every friggin time they start to print money as if the world would be running out of ink, countries begin to default.

Of course! Austrian Economics is right!
Of course! We are not going anywhere!

And there you have it, dear reader. Straight from the horse's mouth. Remember it is their data, not ours. You may choose to believe us or them. It's your choice, but for your own sake, try not to make it a fiat one.

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

Download this file (CRAG-Database-30-01-14.xls)CRAG-Database-30-01-14.xls[ ]168 kB
Download this file (Technical_Report_101.pdf)Technical_Report_101.pdf[ ]293 kB
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