Economic, fiscal and monetary policies need
a radical rethink

Global debt reached alarming new heights in 2025. Worldwide debt – public, corporate and household – increased by nearly $29 trillion to approximately $350 trillion, bringing the global debt-to-GDP ratio above 300 percent. Nearly two-thirds of that increase came from advanced economies, driven primarily by government deficit spending. The trend has worsened in 2026.

At the same time, debate is intensifying over whether artificial intelligence will continue its expansion or whether the sector is entering bubble territory. AI will undoubtedly transform economies and societies. That, however, does not mean today’s valuations are justified.

The amount of capital flowing into AI is staggering. The largest United States-based technology companies alone plan to invest more than $4 trillion in AI by 2030. Thousands of additional companies are making significant investments of their own. Much of this expansion is debt-financed. Equally concerning is the increasingly opaque financial relationship among the largest firms.

A growing share of this debt is likely to be repackaged into private investment products, moving it off banks’ balance sheets and making the overall level of financial risk more difficult to assess.

The crucial question is whether AI will ultimately deliver the productivity gains it promises. That is likely, but even genuine technological revolutions can be accompanied by major valuation corrections and bursting asset bubbles.

None of this suggests that investment should stop. History shows that when economies venture into new technological frontiers, many investments prove futile in hindsight. That is the inevitable price of innovation. Progress requires the courage to invest despite uncertainty.

Dangerous limits

Our economic and financial systems, however, are approaching dangerous limits, largely because of poor political decisions and mediocre or ideological leadership. Fundamental changes in thinking are necessary.

The world now needs an economic miracle. Such a transformation can only come from technological innovation that substantially raises productivity, combined with reforms that once again recognize the principle of scarcity. This requires a substantial downsizing of government institutions and the regulatory and administrative framework.

Today, one of our greatest wastes is human talent. Vast numbers of people are employed to create, administer and enforce unnecessary regulation, sustain oversized public sectors and manage inefficient welfare systems. Both democracies and autocracies suffer from this problem. Excessive taxation diverts capital away from productive investment, reduces consumers’ purchasing power and shifts skilled workers into administrative rather than productive roles. Even more damaging, excessive bureaucracy suppresses creativity, entrepreneurship and individual freedom while rewarding the wrong incentives.

The transformation can only come from innovation that raises productivity, along with a downsizing of government and the regulatory framework.

 

Persistent inflation is one consequence of this waste. The world’s enormous debt burden is the result of decades of reckless spending, particularly in developed economies, which have also imposed excessive regulatory and tax burdens on businesses and households.

The 2008 subprime mortgage crisis and the subsequent European sovereign debt crisis should have served as powerful warnings. Instead, public spending became even more irresponsible.

The European sovereign debt crisis, triggered by the 2010 crisis in Greece, exposed a deeply flawed system. Government bonds issued by developed countries were treated as virtually risk-free assets, regardless of the underlying state of public finances. Commercial banks therefore accumulated them because regulators allowed them to count fully toward capital requirements. Insurance companies, pension funds and private investors also relied heavily on these securities. Governments thus created guaranteed demand for their own debt.

When confidence weakened during Europe’s sovereign debt crisis, this system could no longer function. Central banks responded through quantitative easing, purchasing government debt on an unprecedented scale despite long-standing rules designed to separate monetary policy from fiscal financing.

Quantitative easing became a toxic mix of fiscal and monetary policy. Central banks increasingly financed government deficits while artificially suppressing interest rates. The predictable result was soaring asset prices, followed by significant consumer inflation.

An exhausted financial system

Former European Central Bank President and former Italian Prime Minister Mario Draghi accurately diagnosed many of Europe’s structural economic weaknesses in his report commissioned by the European Union. Yet his proposed remedies largely called for greater centralization within the same institutional framework that helped create the problem.

As Agatha Christie wrote in “The Mysterious Affair at Styles”: “Everything must be taken into account. If the facts will not fit the theory – let the theory go.”

The current financial system is gradually exhausting itself. Many economists and bankers continue to ignore its structural weaknesses because no politically acceptable alternative has emerged. New financial technologies, including central bank digital currencies and stablecoins, cannot solve the underlying problems of excessive public spending, misallocation of capital and labor or unsustainable debt. Central banks themselves have become part of this self-reinforcing cycle.

There are signs that Kevin Warsh, the new chair of the U.S. Federal Reserve, is taking a different approach. He has inherited an enormous accumulation of problems. Yet he may soon face another challenge as governments struggle to finance their debt.

Pension funds around the world – particularly in Japan – hold substantial amounts of U.S. Treasuries. Governments facing rising borrowing costs may increasingly pressure domestic pension funds to replace those holdings with their own sovereign bonds. Such developments would further complicate financial markets and make sustained productivity growth even more essential.

John Mauldin, the brilliant U.S. economist and author, has expressed cautious optimism about Mr. Warsh’s approach. He argues that the new leadership intends to base policy on deeper analysis, better data and more effective communication. Five task forces have been established, with inflation receiving particular attention.

Inflation is not simply a monetary phenomenon. It is also a symptom of failed fiscal policy, excessive public debt and poor economic management. Mr. Warsh intends to reassess how the Federal Reserve understands the drivers of inflation and how it responds to them. Mr. Mauldin believes the individuals leading these task forces were chosen for their practical experience and are likely to produce actionable policies rather than theoretical recommendations.

If successful, this shift could prove highly significant. It offers hope that better analysis, sounder policymaking and higher productivity might finally begin reversing the long decline in fiscal and monetary discipline.