Shut your eyes and try to visualise $160tn. It might seem impossible. Those zeroes in $160,000,000,000,000 — which almost take up a line by themselves — are enough to make anyone dizzy. But right now we should try anyway because a new report about the state of the world’s balance sheet (that is, its assets and debts relative to growth) contains a startling finding. Number crunchers at the consultancy McKinsey believe that, since 2000, the world’s stock of paper wealth (the speculative, unrealised price of all its financial assets) has jumped by some $160tn. Yes, really. Partly, that reflects real economic growth. But it primarily stems from a sharp rise in global debt and in the supply of money through quantitative easing, particularly in countries such as the US, which has raised asset prices. For every dollar of global investment made since 2000, some $1.90 of debt has been added. During the 2020 and 2021 period, this “accelerated to $3.40 for each $1.00 in net investment”, McKinsey says. This was the fastest rate in 50 years. That has raised the putative value of all global assets, relative to gross domestic product, from about 470 per cent of global GDP in 2000 to more than 600 per cent today, with real estate and equity markets booming faster than the “real” economy to a truly remarkable ($160tn) degree. Most of the time, this pattern is rarely discussed. That is partly because tracking this global balance sheet involves so much guesswork that few analysts have ever tried (except for some mavericks at the Bank for International Settlements). But it is also because it is a trait of human nature to assume that whatever we grew up with represents “normality” and will continue. And since stealthy asset price inflation has been happening for so long, even before 2000, it now feels entirely “normal”. Two factors now unfolding should make us all rethink this. One, asset price inflation has been a key factor behind the rising wealth inequality that economists such as Thomas Piketty have identified in recent years and which has poisoned western politics. Two, this trend of ever-rising asset prices might be about to change. A key factor behind it is that interest rates have been on a decades-long downward trend, making debt cheap. However, last year, rates jumped up, wiping some $8tn, equivalent to a third of the US economy, from household assets in 2022 alone. Perhaps this is a blip. The price of bonds suggests that many investors expect rates to sink in the future. And the McKinsey report, titled “The Future of Wealth and Growth is in the Balance”, outlines four potential future scenarios — one of which is a return to what we consider “normal”, namely low rates and more asset price rises. But I personally doubt that this is likely. This week Jamie Dimon, head of JPMorgan Chase, warned that “everyone should be prepared for rates going [even] higher from here”. That raises a key question: if we are moving into a new “normal”, how will we cognitively adjust? Unnervingly, the answer is unclear. Another of the scenarios sketched out in the report is one where inflation stays high and volatile for a long time, combined with some growth. If that happens it could unleash a pattern known as “financial repression” — the economic term for a place where the yields on long-term government bonds stay lower than inflation for several years, essentially causing anyone who holds such bonds to lose money each year. Recommended Gillian Tett The financial markets go down the rabbit hole A third option is a wave of balance sheet restructurings and recessions that reduces the excess debt. As David Graeber wrote in his book Debt, when debt and asset prices have surged before, it has typically produced political implosions or sent governments scrambling to create social “safety valves” — such as debt forgiveness — to avoid meltdown. This sounds sensible in theory; as ancient Mesopotamia discovered several millennia ago, the idea of “wiping the slate clean” of excess debts can enable a society to reboot. But McKinsey estimates that a fully fledged balance-sheet recession and restructuring could wipe out $48tn of household wealth in the coming years, with 30 per cent falls in equity and real estate prices in places such as the US. That would probably help to reduce inequality in the long run. But it would be such a shock that it could dampen confidence — and economic growth — badly. Of course, there is also another possible scenario: a productivity miracle that enables real economic activity to expand much faster than paper wealth and debt, rebalancing the world. That would be the holy grail. But it is hard to believe it will occur. So I would urge you, once again, to ponder that dizzying $160tn number. And then ask: can we adjust our minds to an era where asset prices do not always rise? What will be our future “normal”? Follow Gillian on Twitter @gilliantett and email her at gillian.tett@ft.com Follow @FTMag on Twitter to find out about our latest stories first
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