Satyajit Das: Chronicle of A Financial Crisis Foretold – Part 1

In his 1981 pseudo-journalistic novella Chronicle of a Death Foretold (Crónica de una muerte anunciada), Gabriel García Márquez, tells the story of a murder. Unusually, there is no tension or details to uncover as the book begins with the widely foreseen death. The true mystery is why it was allowed to happen.  In a similar way, the world seems currently mesmerised by the slow-motion financial crisis that is unfolding. 

This two-part piece outlines the coming crisis. Part 1 examines the key conditions driving the process and the linkages that will propagate the shocks. Part 2 will look at the effects on new sectors, such as private markets, and the absence of safe havens.. 

The pieces are based on a forthcoming book: The Everything Bubble: A Guide to the New Age of Speculation and Phantom Wealth. Earlier versions have been published at the New Indian Express.

Trip Wires

Psychologist James Reason’s Swiss Cheese Model holds that major disasters in complex systems are the result of the accumulation and alignment of multiple failures (the holes). Today, several risks – overvaluation, high debt, cash flow shortfalls, volatility, rising interest rates, interconnections, financial games, poor safeguards – are creating the perfect conditions for a financial crash.

Valuations are stretched. Cyclically adjusted ten-year US price earnings (CAPE) ratios are at their highest levels since the 19^th century, above the levels of 1929 and only slightly below the peak of the dotcom boom. They are around 41 times earnings and over 67 times earnings if current exaggerated corporate incomes are normalised. In comparison, CAPE reached 32.6 times and 44.2 times earnings before the crashes in 1929 and 2000, respectively. The ratio of US share market’s capitalisation to GDP (known as the Buffett Indicator) is over 230 per cent of GDP, the highest recorded level. Valuations of non-US equities are also extended, although to a lower degree. 

The problem is compounded by concentration risk. At the peak, the US constituted over 60 per cent of global equity indices, well above its share of GDP of 26 per cent (by nominal GDP) and 16 per cent (adjusted for purchasing power). The technology sector accounts for anywhere up to half the value of the S&P 500 depending on the definition used. A few technology companies in the MSCI Emerging Markets Index, which measures the performance of large- and mid-cap companies across developing countries, makes up about 30 per cent of the benchmark, up from 18 per cent at the end of 2023.

Property, the largest repository of global wealth, is overvalued by up to 50 percent using price-to-affordability metrics, although there are significant locational discrepancies. 

Price rises have outstripped underlying cash flows. Across ten countries that account for 60 per cent of global GDP, as of 2025, $620 trillion in real assets, like machinery and equipment, infrastructure, buildings, natural resources, and intellectual property, support over $1,200 trillion in financial assets representing eventual claims against the same property and cash flows. Since 2000, wealth growth has reflected valuation gains in financial assets, especially real estate, rather than changes in productive assets. 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.

As of mid-2026, global debt has reached around $350 trillion or 308 percent of world output, up from around $210 trillion a decade ago. Debt matures and must be repaid or refinanced. 

Around $6.7 trillion, including $1.2 trillion of non-investment-grade debt and $330 billion of private-credit loans, must be refinanced by 2028 at a higher cost than the current low rates. The U.S. government must currently refinance about a third of its debt every year. Cash insufficiency threatens failures and credit losses. As interest rates rise, there are already pockets of distress amongst less creditworthy borrowers.

JP Morgan CEO Jamie Dimon has spoken of ‘credit cockroaches’. The oft-repeated phrase is inaccurate, as actual cockroaches are highly resilient, having survived for hundreds of millions of years. A more accurate metaphor would be ‘debt termites’, insects that infest and destroy structural timbers. They have hollowed out finance, markets, economies, and societies over decades. 

In parallel, investors, pension funds and insurers, rely on cash flows from their investments to finance spending or meet contractual payouts. Lack of distributions and write-offs reduce available funds that underpin economy activity creating adverse feedback loops. Simultaneously, higher volatility feeds risk models triggering margin calls and involuntary deleveraging as lenders tighten liquidity.

The cost of capital is rising. The era of low government bond yields may have ended. Higher for longer rates are probable due to cost pressures from wars, disruption of supply chains, and national security driven reshoring. Premiums for risky assets, which have declined to historical lows, will rise to compensate for increased instability. The rising gap between required returns and cash generation undermines asset prices.

Safeguards are being weakened. Regulators are perversely reducing bank capital requirements at a time when they are likely to be needed. The decreases, lobbied for by the banks, are intended to boost economic growth by more debt-financed consumption and investment ignoring existing elevated levels of borrowing.