The next global financial crisis is already under way. Here is how it will unfold.
A wave of debt threatens the global economy.
Forget stock-market 'FOMO.' Worry now about 'NOGO' - no option but getting out.
All financial bacchanals end when an event, often minor but only obvious in hindsight, sets off an uncontrollable chain reaction. Central to this process is the effect of unsustainable valuations and price volatility on the flow of funds.
Property, the largest concentration of global wealth, is overvalued by up to 50%, using price-to-affordability metrics, although there are significant locational discrepancies. U.S. property is overvalued by roughly 10% on average, but individual cities show high bubble risks, as do parts of Australasia, Europe and Asia - especially the major financial hubs.
Global stock prices remain elevated despite recent corrections. The Shiller CAPE (cycle-adjusted price-to-earnings) ratio is at a significant premium to the 25-year average. Depending on the indicator used, share prices are anywhere up to two times overvalued. With private-market investments, questions remain whether model- or funding-round-based valuations are actually realizable. Volatility of prices - which affects risk models, availability of credit and hedging costs - is high.
Since 2000, price increases have outstripped underlying income. Across 10 countries that account for 60% of global GDP, McKinsey found $500 trillion in real assets supported more than $1,000 trillion in financial assets; the latter offset by liabilities representing eventual claims against the same properties. For every $1 in net new investment in real assets over the past 20 years, liabilities have grown by almost $4, of which about $2 is debt.
High valuations and volatility are tolerable if funded by long-term equity capital - not borrowed money that must be serviced and repaid.
Debt levels are stretched. In the real economy, the government, households and some businesses have borrowed significantly. In the financial economy, leverage is high with a layer cake of debt at the investor, fund, instrument and underlying investment level. A modestly leveraged private credit fund may have investors who borrowed to fund their stake, loan recipients with high levels of debt, CLO investments with embedded leverage, and banks, eight- to 10-times leveraged, supplying money to the parties.
Debt is a bed of nails. Borrowers must refinance in an environment of high interest rates and reduced funding availability.
Equity may be comfortable for now - but debt is a bed of nails. Borrowers must refinance in an environment of high interest rates and reduced funding availability.
Interest and repayments absorb increasing amounts of available business earnings. As prices fall and volatility increases, debt coverage decreases, prompting margin calls as a high proportion of debt is secured over financial assets - forcing deleveraging. Layered leverage means multiple claims on the same underlying cash flows.
Around 40% of U.S. companies, particularly mid- and small-caps, have negative earnings. Perhaps 15% of global companies are 'zombies,' generating enough revenue to pay interest but not pay down principal debt or make shareholder distributions. Private-market vehicles assume regular realizations of unlisted share investments and repayment of private loans, which have slowed due to the lack of exits or losses.
In recent years, much of the earnings and investor distribution has come from highly profitable technology companies. But even they now face shortfalls as cash flow is directed into AI projects and losses on those investments. They may have to reduce dividends and share buybacks. In addition, many now need to issue equity and debt, which absorbs available funds.
Downward spiral
Meanwhile, a greater need for cash forces shareholders to sell anything liquid and still show gains, creating contagion-spreading problems across asset classes. Insufficient liquidity to meet obligations triggers financial distress. Lender losses drive a contraction of credit availability, the lifeblood of modern economies, leading to slowing economic activity and driving further iterations of the pernicious cycle. Increased reliance on asset appreciation rather than cash income exacerbates this pressure as money for consumption and investment expenditures requires increased borrowing.
For capital importers like the U.S., to which foreigners have exposures of around $30 trillion, falling asset prices will be amplified by currency weakness as investors exit - creating adverse feedback loops and financing pressures.
The spiral is accelerated by crowded trades and herding behavior, such as exchange-traded funds and quantitative trend-following models. Another factor is retail investors, dazzled by FOMO (fear of missing out), FEMO (fabulous earning momentum) based on the other "EBITDA" (earnings before Iran, tariffs, Donald and AI) and TINA (there is no alternative). Eventually, NOGO (no option but getting out) means panic and risk aversion takes hold.
The process is already under way. Evidence includes the overpriced equity and debt issuance by SpaceX $(SPCX)$, gating of funds invested in unlisted equity and debt, and rising defaults in some highly levered parts of the economy.
The scale of current problems is substantial: AI investment alone is around 17 times that of the 2000 dot-com boom, and four times the 2008 subprime housing crisis. Accounting for asset write-downs, corporate failures and diminution of wealth, the dot-com and subprime losses are estimated at around $5-6 trillion and perhaps $15-20 trillion, respectively. Markets, which suffer from short-term thinking, believe that firsthand experience is the best teacher. They forget how costly this lesson is.
Satyajit Das is a former banker and author of "The Everything Bubble," to be published in 2027.
-Satyajit Das
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(END) Dow Jones Newswires
July 10, 2026 13:32 ET (17:32 GMT)
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