The World Economy May Be Closer to a Breaking Point Than It Looks

The central bankers’ bank says AI exuberance, high debt, inflation risk and fragile bond markets are shrinking the world’s room to absorb the next crisis.

Brian Daitzman is the Editor of The Intellectualist. Subscribe to his Substack.

The global economy, by many surface measures, still looks surprisingly strong. Markets remain buoyant. Artificial intelligence has become the organizing story of a new investment cycle. Governments continue to borrow. Oil prices have retreated from their most alarming levels. Growth has not broken in the way many analysts once feared.

That is why the latest warning from the Bank for International Settlements matters. The BIS is not a political body, a campaign organization or a market commentator. It is the institution often called the central bankers’ bank, a forum for the officials responsible for money, inflation, banking stability and the financial plumbing that keeps the global economy functioning. When the BIS warns that policymakers may have less room to maneuver, it is not speaking in the language of alarmism. It is speaking in the language of people whose job is to prevent financial stress from becoming systemic.

The BIS is not predicting a collapse of the global economy. Its warning is more subtle, and in some ways more disturbing. The danger is not that one crisis is certain to arrive. It is that ordinary shocks may now become harder to absorb because the system built to absorb them has weakened.

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For much of the past year, the global economy appeared more resilient than expected. Artificial intelligence promised a new productivity revolution, and the capital spending around it helped sustain optimism across financial markets. Trade held up better than many expected. Markets reflected expectations of stronger productivity, greater automation and higher future profits. But in its latest Annual Economic Report, the BIS argues that this resilience rests on a more fragile foundation than markets suggest.

The danger is not one event. It is convergence.

The AI boom may be real, but it may also be overextended. Public debt is near record highs in many economies. Higher interest rates have made that debt more expensive to carry. Hedge funds and other non-bank financial actors now play a larger role in sovereign-debt markets, often with leverage that can accelerate stress rather than absorb it. Inflation, which many governments hoped had been contained, is again vulnerable to supply shocks. And the Strait of Hormuz disruption has reminded policymakers that energy risk can return suddenly, through geography, conflict, shipping lanes and chokepoints, with consequences that outlast the first move in oil prices.