This month, politicians in Washington are worrying — yet again — about global imbalances. No wonder: not only does the US need foreign investors to buy an ever-swelling pile of Treasuries, but China’s exports keep surging, fuelling western deficits. However, there is a second aspect to today’s imbalances that is rarely discussed: the size of global finance relative to the “real” economy.
This has fascinated me since I interviewed an Islamic finance scholar in 2007 who likened modern markets to a candyfloss machine. The reason? Real assets — like houses — were being used to secure debt that was then rehypothecated multiple times, partly with derivatives, just as sugar is spun and respun into candy floss.
That financial cloud looked impressive. But, like candyfloss, the value of its “real” assets was small — as we discovered when finance imploded.
Has this now changed? You might think so, given that the 2008 crisis showed the perils of excess financialisation. But nothing could be further from the truth. The McKinsey Global Institute has just published a fascinating balance sheet estimate of the world’s assets, liabilities and wealth. This series, which started in 2021, is unusual in measuring both public and private assets.
In 2025 this balance sheet was apparently $1.8 quadrillion, a record $100tn higher than in 2024 (global GDP was $117tn.) This nominal figure included $620tn of “real” assets (real estate, infrastructure, machinery and equipment and intellectual property), $550tn of financial assets (equity, loans, bonds and currency), balanced by $600tn of global wealth, overwhelmingly owned by households.
This is startling. But the details are even more so: global household wealth has risen more than fourfold since 2000, dramatically faster than the “real” economy, amid asset-price inflation. America accounts for $175tn of this; China $75tn. And while it was rising real estate prices that drove this two decades ago, last year it was surging equity prices, particularly in the US, that accounted for 57 per cent of the wealth increase. “Real” assets were a measly 20 per cent, far lower than before. Meanwhile, US asset prices are now 3.7 times GDP — double the historic average.
“Global wealth growth was driven to a greater extent by paper wealth, or nominal asset value decoupled from the real economy,” McKinsey notes. In plain English: rich consumers have a candyfloss economy.
Other details are also notable. Household debt, relative to GDP, has shrivelled since 2008, particularly in America. That’s a good thing. But government debt has surged in the US, Japan and Europe. Chinese corporate debt has exploded too. Meanwhile “productive assets”, relative to GDP, have doubled in China since 2000, even as that ratio has flatlined in America — where it is now below the early 1980s level. Ouch.
Many Americans might shrug or note that some of China’s “productive assets” might not be so productive due to over-investment, while some US assets might be undercounted since it is so hard to measure digital investment. Figures such as Kevin Warsh, Federal Reserve chair, think (or hope) that AI will unleash a productivity miracle. This could enable the US to grow out of its ever-rising sovereign debt and justify its equity valuations.
Moreover, many economists consider some financialisation to be good. The IMF, for example, has long urged poor countries to embrace financial deepening to boost their growth. Under that logic, the swelling size of US capital markets might be seen as evidence of economic sophistication and strength.
However, “you can sometimes have too much of a good thing”, as Jan Mischke of McKinsey tells me, noting that the current pattern “is pretty extreme”. Indeed. And obvious risks now abound.
One issue, the Bank for International Settlements said recently, is that wealth is now so dependent on US stock markets — and US AI exuberance — that “a major equity market correction could have larger macroeconomic consequences today than in the past”. A jolt might yet occur as a result of the competition from Chinese open-source AI models such as this month’s Kimi K3 launch.
Another danger, says the IMF, is that rising long-term interest rates could spark a sovereign debt crunch or prompt governments either to inflate their way out of the debt or to restructure it (unless that AI miracle occurs).
Then there is a more subtle philosophical issue: as my colleague Rana Foroohar has noted, financialisation turns humans from “makers” (of real products) into “takers” (of financial value). Many religions dislike this; hence the Islamic scholar’s quip to me in 2007. But I suspect many voters do too, given that popular western culture prefers to present finance as a means to spark growth, not an end in itself.
Still, such qualms are unlikely to deter investors from gobbling up US equities, or Chinese banks extending corporate loans. For better or worse, our 21st-century world seems addicted to financial candyfloss, not least because it makes the rich feel ever richer. US President Donald Trump had better pray this doesn’t end in a sticky mess.