Hangover Anticipated for Global Markets Brought on by Central Bank Binging: A Cautionary Tale
Written by Hans Hoogervorst, Editorial Committee Member, Skytop Contributor / August 8, 2025
Hans is a distinguished Dutch former minister and public policy expert with a notable career in both the public and private sectors. He served as the Chairman of the International Accounting Standards Board (IASB) from 2011 to 2021, where he played a pivotal role in shaping global accounting standards. Prior to this, Hans held various significant positions in the Dutch government, including, Minister of Economic Affairs, and Minister of Health, Welfare, and Sport. His leadership extended to the Netherlands Authority for the Financial Markets (AFM) and the International Organization of Securities Commissions (IOSCO) Technical Committee, where he served as Chair, contributing to the regulation and oversight of financial markets.
Throughout his career, Hans has been recognized for his expertise in economics, finance, and governance. His work at the IASB was instrumental in promoting transparency and accountability in financial reporting worldwide. Hans's extensive experience and dedication to public service have made him a respected figure in the world of finance and accounting. Known for his strategic vision and commitment to high standards, he has left a lasting impact on the institutions he has led and the global financial community.
Fiscal Excess, Debt and Hangover Defined
In April the International Monetary Fund raised alarm about the level of public debt around the world. The Fund pointed out that public debt in many countries has reached unprecedented levels while tariffs, uncertainty and volatility are increasing risks. As Chart #1 shows, the state of public finances around the world is indeed not a pretty picture.
The US is heading for public debt of 123% of GDP, a level that is only surpassed by Italy with 137% of GDP and Japan with 235% of GDP. Other major economies are not doing much better, with public debt in the UK and China hovering around 100% of GDP and France at a barely sustainable level of 116% of GDP.
In the past, such extreme debt levels would only be achieved in times of war. Both the United States and the United Kingdom ended the second world war with public debt above 100% of GDP. It is a remarkable fact that we reached current debt levels in a relatively peaceful period in which many countries have been spending less than 2% of GDP on defense. While the war in Ukraine has made many countries realize that they will need to increase military expenditures drastically, most of them are already struggling with heavy debt burdens.
When we look at the combination of public and private debt, the picture becomes even starker. All major economies have a total debt level of well over 200-250% of GDP, with China, France and Canada hovering around 300% of GDP and Japan close to 400% of GDP.
The following overview of the IMF shows that the explosion of debt levels has been long in the making. This picture shows the relentless rise of total public and private debt in the global economy, from about 120% of GDP in the early eighties to more than 250% of global GDP at the height of the Covid pandemic. I will talk later about the risks associated with these debt levels, but let’s first try to answer the question how we got there.
An important reason behind the rise of debt levels were the increasingly dovish monetary policies of central banks around the world after the heroic inflation fighter Paul Volcker stepped down as chairman of the FED in 1987. The acceleration of the buildup of debt and liquidity since the mid-eighties was one of the main causes of the Great Financial Crisis (GFC) in 2008. Yet central banks, petrified by the specter of another Great Depression, responded by doubling down on monetary easing.
They resorted to Quantitative Easing (QE), buying up massive quantities of (mainly) government bonds, pushing down long-term interest rates to extremely low levels. Europe and Japan even experimented with negative interest rates. In response to the Covid pandemic, QE was pushed to ever more extreme levels from 2020. In the UK and the UK the yield on 30-year governments fell to below 1%. Just think about it, a return of less than 1% for 30 years of risk! Central banks’ balance sheets started filling up with government bonds. The industrialized world ended up doing what the IMF had always told developing countries not to do. In essence, central banks were bailing out governments everywhere.
Central banks felt legitimized in their actions by the fact that inflation stayed low for a very long time. They were convinced that they had anchored inflation expectations at low levels. In retrospect, it is clear that globalization played a major role in keeping prices low. With Eastern Europe, China and other Asian countries integrating in global markets, the global economy was flooded with cheaply produced consumer goods. While the unorthodox monetary policies seemed to come at no cost, negative side-effects started building up almost immediately.
First, fiscal discipline suffered tremendously around the world. I was a minister in several reform-minded cabinets in the Netherlands and I can tell you from personal experience that slimming down our welfare arrangements was an incredibly difficult job. But we were always able to say that money does not grow on trees and that we could only spend within our means. After the GFC, this simple story no longer seemed to hold up. Quantitative easing de fact made central banks into money trees. In response, politicians started loosening the purse strings everywhere and debt levels started to rise.
Monetary accommodation also led a tremendous inflation of asset prices in financial and housing markets everywhere. Given that most financial crises are caused by the combination of excessive debt and overvalued asset prices, it is remarkable that central banks chose to largely ignore these developments. QE also led to rising social inequality between those who owned assets and those who didn’t and has contributed to the rise of populism.
Ultimately, of course, inflation came back with a vengeance during the Covid-pandemic. The combination of disrupted supply lines, massive quantitative easing and fiscal excess finally led to an explosion of inflation.
Slide: inflation at micro level
Looking at these micro-inflation numbers, it is not surprising that people got very angry.
Central banks were so sure that they had conquered inflation for good that they were slow to react, deeming the surge in inflation to be transitory. But ultimately they had to resort to more traditional policies, raising interest rates and putting a stop to QE.
While inflation has indeed come down, it remains to be seen whether this success is durable. It is also clear that the world is still grappling with a serious hangover from the prolonged fiscal and monetary parties in the past decades.
In his brilliant book “What went wrong with Capitalism” (2024) the American economist Ruchir Sharma laid bare that QE was part of a broader trend of increasing government interventionism in the industrialized world. While many see the ills of our time as the product of neo-liberalism, what really happened in recent decades is that government in developed nations expanded in just about every measurable dimension. Public spending and regulation increased almost everywhere and every time the economy wobbled, ever increasing bail-outs were put in place.
This brought short-term success; there was no recession in the United States between 2009 and Covid. But the end result is, according to Sharma, “socialized risk”: Expensive government guarantees, for everyone―welfare for the poor, entitlements for the middle class, and bailouts for the rich. This has steadily sapped the strength of the market economy. As a result, productivity and economic growth have slowed sharply. Annual productivity growth slowed from more than 2% at the beginning of the century to less than 1% in the past decade. This shrinks the pie for everyone and feeds popular anger.
A quick tour d’horizon of the world economy makes clear there are many challenges ahead.
Europe. In Europe, the ECB has been keen to reduce interest rates as soon as possible. The official ECB interest rate has been rapidly brought down to 2.25% even though core inflation rose to 2.7% in April. More interest rate cuts are expected.
The haste with which the ECB has been cutting rates can be explained by the perilous state of public finances in countries like Italy and France. These countries simply cannot handle historically normal interest rates of 4% or more.
Moreover, the ECB has made it clear it stands ready to yet again buy up debt of highly indebted countries should interest rates get too high. Unsurprisingly, nowhere in Europe are serious structural reforms on the table. While most of Europe is ageing rapidly, in most countries the pension systems are close to untouchable. France is even considering lowering the pension age, rather than increasing it.
I am afraid that the best Europe can hope for is mild stagflation. Yet a rekindling of the European debt crisis is also a distinct possibility.
China Comes to the Rescue
After the GFC, China came to the rescue of the global economy with a massive stimulus program, but the country is now suffering under the weight of empty apartments and heavy debts. While China has made impressive technological progress, it will take many years to sort out the real estate crisis. Western economists keep telling China to stimulate domestic demand, but the fact is that the country is already mired in debt. As a result of the worsening international trade environment a deterioration of its already difficult economic situation cannot be ruled out.
Japan. After more than two decades of relentless Quantitative Easing, Japan has finally achieved inflation, currently running at 3-4%. The Japanese people are not happy. The Japanese Central Bank is cautiously increasing interest rates, but, like in Europe, the government’s enormous debt severely restricts its room for maneuver. Even now, the Bank of Japan is still engaged in QE. Its efforts to taper QE is already putting strain on the market for long term government bonds. Public debt keeps on growing, further burdening an ageing and rapidly declining population. Expect the relative decline of Japan to continue, while inflation will lead to increasingly angry voters, even in this harmonious country.
Unprecedented Deficit Held by the United States
The fiscal outlook for the United States is dire. President Biden left a budget deficit of 7% of GDP, which is unprecedented in an economy running at near-full capacity. The federal government already spends more on interest than on defense and this will not improve.
The outlook for the budget deficit under President Trump, the self-professed “king of debt” is not good, to put it mildly. The budget bill contains insufficient expenditure cuts to finance its tax cuts. It might add another 25% of GDP to the public debt.
The Fed is under tremendous pressure to lower interest rates further, but the truth is that interest rates are probably already too low. The Fed has missed its 2% inflation goal in the last five years and expects to miss it again in the next two years. In such circumstances a man like Paul Volcker would never have considered lowering interest rates. It is not likely that President Trump will appoint a monetary hawk to succeed Chair Jerome Powell next year. So, both fiscal and monetary policies are likely to remain too loose.
If all these problems are not big enough, the trade war unleashed by the Trump administration greatly increases the risks in the global economy. Even with most reciprocal tariffs on hold, America’s overall tariff rate is currently 15-20%, about five times its level in January and the highest since the 1930s. The end result of tariff negotiations will probably be higher. This will certainly hurt the global economy significantly and likely push inflation upward, certainly in the United States.
The Condition, Further Symptoms and No Clear Cure
The sorry state we are in is a result of political dysfunction. We have used fiscal and monetary laxity to paper over the cracks. Yet this only served to deepen political dysfunction even further by getting politicians off the hook.
Restoring fiscal and monetary discipline will be extremely challenging. Neither central banks nor politicians have even started to acknowledge the damage that has been done by the fiscal and monetary excesses of the recent past.
The renowned economist Kenneth Rogoff does not clearly see an orderly way out of the fiscal and monetary mess that we have created in the last decades. Instead, he expects a lot of volatility in the financial markets in the near future. There are simply too many risks in the global economy and most likely some will catch fire soon.
Rogoff also predicts that the extreme levels of debt is likely to detonate a new round of inflation, which will possibly be even more violent than the Covid inflation wave. I am afraid I have to agree with him. If there is no political will to cut expenditures or increase taxes, in the end inflation is the only way to keep excessive debt manageable.
If you think that all this is excessively pessimistic, let’s hope you are right. I am a bit of a bear by nature and I have predicted gloom and doom before, only to be confounded by markets that keep on bouncing back in the wake of yet another bail-out. And who knows, maybe this time the AI-revolution will come to our rescue and initiate a new period of productivity growth. Or perhaps an even bigger miracle might occur. Leading politicians might decide that the only way out is through and break with the cycle of excess and ever bigger bail-outs. You will forgive me for thinking that currently, this hope belongs more to the realm of dreams than reasonable expectations.