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Global balance sheet hits $1.8 trillion as asset values decouple from real economic output, McKinsey report says

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The global economic balance sheet reached approximately 1.8 quadrillion (1,800 trillion) in 2025, rising from $1.7 quadrillion in 2024.

According to a report published by McKinsey, the world is wealthier than ever before. However, this wealth relies on increasingly inflated valuations of paper assets rather than real output. How this contradiction resolves itself will determine the future of the world’s leading economies, the report stated.

The report noted that several asset classes have further expanded their imbalance with the “underlying” economy. This dynamic heightens the probability of corrections occurring through inflation, asset valuation losses, or, in the best-case scenario, productivity gains.

Unlike growth in the capital stock that generates real output, the tendency to rely on elevated valuations fuels the risk of a painful correction—either through falling asset prices or prolonged inflation.

Nevertheless, a more optimistic scenario exists in which the world essentially grows into these high asset valuations, supported by an artificial intelligence-driven productivity boom.

Researchers found that global household wealth reached $570 trillion, representing a $40 trillion increase compared to 2025.

Yet only 20% of this increase stemmed from genuine capital accumulation—namely net new investments in machinery and equipment, housing and buildings, infrastructure, and intellectual property.

The remainder was driven by a combination of inflation and price appreciation in the market value of existing assets.

In the US and Canada, equity values served as the primary driver of wealth expansion. In China, France, and Germany, paper wealth declined under the weight of falling real estate prices. In the UK and Japan, inflation pushed asset values higher.

This marks a more extreme iteration of a long-standing trend: from 2000 to 2024, net investments accounted for 30% of global wealth growth.

Examining the structure from the baseline up, real assets encompass real estate, infrastructure, machinery and equipment, and intellectual property owned by households, governments, and corporations. These carry a combined value of $620 trillion and constitute global net assets across all sectors.

Financial assets held outside the financial sector include equities, bonds, loans, foreign currency and deposits, and pension funds. Every financial asset carries a corresponding liability, and these balance each other out on a global level.

This “financial layer” functions to separate wealth from asset ownership and stood close to the total value of real assets.

The financial sector, meanwhile, intermediates between these financial assets and liabilities. With a volume of $550 trillion, the financial sector has reached 90% of the value of real assets.

Wealth is ultimately the balancing item on balance sheets, equaling the difference between total assets and liabilities. This stood at $600 trillion in 2025.

In 2025, the growing detachment of balance sheets from the real economy was driven by the world’s two largest economies.

With the share of corporate profits in GDP doubling since 2000, US equity valuations rose to 2.4 times the net asset value of corporations.

In China, corporate debt reached 80% of real assets, compared to a global average of 50%.

US public debt is hovering near all-time highs, while the fastest increase was recorded in China.

On a global scale, a major share of corporate and household debt, as well as real estate assets, approached 25-year averages relative to GDP.

Inflation contributed to this normalization; however, values remain well above pre-2000 levels. Against a backdrop of flat investment, the ratio of productive assets to GDP remained stagnant.

Jan Mischke, a partner at the McKinsey Global Institute, told Axios: “We can now say that every asset on this planet has been financialized.”

There are several plausible paths through which these elevated asset valuations could uncoil. One is a simple “muddle through” approach: low growth leads to low interest rates, which allows high valuations to persist. This is roughly what occurred in major economies during the 2010s.

However, more dramatic possibilities exist—some positive, others alarming.

The best-case scenario for the global economy involves a productivity leap driven by AI or other sources that sparks a GDP boom, thereby justifying the high valuations of equities and other asset classes. This is essentially what occurred in the late 1990s.

A more pessimistic possibility is that sustained inflationary pressure erodes the real value of assets, forcing them back toward historical norms and leaving people poorer in real terms. This occurred, arguably, during 2021–2022.

The most concerning scenario is a global asset price reset of the kind witnessed in 2002 and 2008.

“Overstretched scenarios have a tendency to mean-revert, including in positive ways like productivity acceleration,” Mischke said. “But occasionally, you also get a major debt crisis or a market crash.”

Arvind Govindarajan, one of the co-authors of the report, posed the central question: “For us in the US, the real question is: Will productivity and GDP be higher—in which case we see a productivity boost—or will we slide into an inflationary scenario?”

Entering 2026, major economies followed diverging roadmaps, according to the report. The US operated under a “productivity acceleration” scenario, though high public debt and stretched equities keep the possibility of “persistent inflation” or a “balance sheet reset” on the table.

Europe drifted toward “secular stagnation,” as sluggish demand pulled down growth and interest rates.

In China, while a partial balance sheet reset unfolded amid falling real estate values, public spending and corporate investment continued to support balance sheet growth.

America

Iran war costs US economy $265 billion as household burden mounts

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The economic toll of the conflict on the US has reached $265 billion in the roughly eight months since the start of joint US and Israeli strikes against Iran.

According to calculations by Moody’s Analytics Chief Economist Mark Zandi, this amount imposes an additional burden of approximately $2,000 on the budget of an average American family.

Sharing data on his X account on Tuesday, Zandi noted that the cost per household since the war began stands at about $2,000, with nationwide economic losses reaching $265 billion.

This estimate is seven times higher than the direct military spending figure reported to Congress by Secretary of War Pete Hegseth, which covers the period between the start of the strikes on 28 February and the end of July.

While Hegseth’s official figures cover only direct military operations, the conflict’s impact on global markets and oil prices is driving up inflation and day-to-day living costs, deepening the real burden on household budgets.

Fuel and heating costs strain budgets

Energy items account for the largest share of the additional expenses facing American households. The surge in fuel, home heating, and transport costs has generated an extra bill of about $1,100 per family.

Zandi noted that the price of regular petrol, which hovered just below $3 per gallon before the war, has risen to $4.37, while diesel has exceeded $6 and jet fuel has nearly doubled.

Pointing out that a marked rise in residential heating fuel costs is driving up spending as winter approaches, Zandi said current price levels continue to add roughly $50 a week to family budgets.

Researchers at Brown University’s Watson Institute for International and Public Affairs are also tracking the impact of rising fuel prices on consumers.

According to data from the institute, US consumers have paid an extra $133.3 billion for fuel products since 28 February.

During this period, petrol prices rose by more than 46% and diesel climbed by over 70%. Of this additional burden borne by consumers, $73.5 billion stemmed from petrol and $59.8 billion from diesel. This calculation translates into an extra cost of $1,017.76 per household nationwide.

Loan interest rates and operational outlays inflate the bill

Another decisive factor in the economic picture has been the rise in interest rates.

Zandi reported that climbing interest rates have created a cost of approximately $540 per household.

Fixed-rate home mortgage rates, which stood below 6% before the war, have climbed to roughly 7.5%, Zandi said, adding that long-term rates have also increased substantially.

Direct military operations, meanwhile, represent a cost of $360 per household based on Pentagon data.

However, experts point out that repair, maintenance, and equipment replenishment expenses are excluded from the published figures, meaning actual military spending on the ground could exceed Pentagon estimates.

Linda Bilmes, a war budget specialist who teaches public policy at Harvard Kennedy School, said she is certain the conflict’s bill will reach $1 trillion, adding, “Maybe we’re already there.”

Trump defends spending as public support drops

The mounting economic strain is fuelling backlash against the military campaign and US President Donald Trump’s handling of the process.

A Pew Research Centre survey conducted on 28 September-4 October among 5,062 adults revealed that 65% of Americans disapprove of the way Trump is handling the Iran strikes.

The proportion of those who consider the use of military force justified dropped four percentage points compared with March, falling to 34%.

Emphasizing that the total cost has wiped out roughly half of the average American household’s income gains over the past eight months, Zandi said it is natural for public support for the war to remain so low.

According to figures shared by pollster Nate Silver, Trump’s net approval rating has tumbled to an all-time low of minus 23.5 points.

Defending the military intervention against Iran, Trump described the costs as “a small price to pay to keep our country and the world safe.”

With the surging cost of living piling pressure on Republicans ahead of the November midterm elections, Trump announced last month that he would provide a $5,000 cash payment to every adult in the country if his party maintains its majorities in both chambers of Congress.

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US fines Bank of America $1.21bn over money laundering and sanctions

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The US Department of the Treasury has imposed a total of $1.21 billion in financial penalties on Bank of America, one of the country’s largest financial institutions, for violating anti-money laundering legislation and sanctions regimes.

According to a statement published by the department, the bank was accused of failing to report suspicious transactions in a timely manner, failing to monitor financial movements that posed national security risks, and providing services to clients on sanctions lists.

Decisions by units operating under the Treasury Department accounted for the largest components of the penalty package.

The Financial Crimes Enforcement Network (FinCEN) penalised the bank for failing to report more than $5 billion in suspicious transactions in a timely manner.

More than $1 billion of that amount was noted to be directly linked to national security risks, including the operations of China-based money laundering networks.

Under the settlement reached with FinCEN, Bank of America admitted to willfully violating the Bank Secrecy Act. The bank was required to conduct an additional review covering suspicious transactions and to assess the effectiveness of its financial monitoring system.

The Office of the Comptroller of the Currency (OCC) separately fined the bank $750 million over structural deficiencies in its financial monitoring system.

The OCC stated that the bank failed to maintain adequate oversight over trillions of dollars in fund transfers and did not remedy the violations despite a formal notice served in December 2024.

The Office of Foreign Assets Control (OFAC) also stepped in over millions of dollars in transactions carried out in breach of sanctions regulations. OFAC reached an $11.6 million settlement agreement with Bank of America concerning 475 distinct potential sanctions violations.

Assessing the matter, US Treasury Secretary Scott Bessent said, “The actions taken today send a clear message that even the largest financial institutions are not above the law.”

UK fines banks over breaches of Russia sanctions

Alongside the penalty decision in the US, similar sanctions scrutiny is being carried out across European financial centres.

In September, the Office of Financial Sanctions Implementation (OFSI), an agency of the UK Treasury, fined Citibank’s London branch (CBNA London) £4.7 million for violating sanctions targeting Russia.

According to findings by the British regulator, between February and November 2022 following the outbreak of armed conflict between Russia and Ukraine, the bank processed 970 payments worth a combined £19.7 million, circumventing asset freezes and other restrictions. The government stated that the majority of the violations were linked to corporate accounts owned or controlled by sanctioned individuals. Russia, meanwhile, describes sanctions imposed by Western nations as illegal.

During the spring, OFSI also fined the London branch of Germany’s Deutsche Bank £165,000 ($221,000) for transferring funds to the Russian online streaming platform Okko.

Over the same period, the watchdog imposed a £390,000 fine on Apple’s European entity, Apple Distribution International (ADI), for a similar violation.

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Musk boosts Republican midterm funding despite pledge to curb spending

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The world’s richest person, Elon Musk, has donated $276 million over the past three months to political action committees and conservative organizations supporting Republicans ahead of the upcoming US midterm elections.

The latest transfer brings the total midterm donations from Musk, the chief executive of Tesla and SpaceX, to $366 million.

First reported by The New York Times, the figures were confirmed to The Hill by a spokesperson for America PAC, which Musk founded. These latest expenditures establish Musk as the largest known donor of the 2026 midterms.

The bulk of Musk’s financial backing between July and September was directed towards congressional races.

The US billionaire transferred $158 million to the Senate Leadership Fund, a super PAC supporting Republican Senate candidates, and $20 million to the Congressional Leadership Fund, which finances House Republicans.

Millions divided among various committees

Musk, who provided more than $76 million during the period to America PAC, an entity he founded during the 2024 election cycle, also funded state-level contests.

The businessman transferred $10 million to the Lone Star Liberty PAC, which supports Texas Republican Senate candidate Ken Paxton, while donating $10 million to the Republican Governors Association and $2 million to the Republican Attorneys General Association.

In statements given to The New York Times and confirmed by The Hill, America PAC spokesperson Andrew Romeo argued that if Democrats take control in Washington and win critical state races, the country faces the risk of becoming one with indefensible borders.

Romeo said the investments enable the Republican apparatus to deliver its messages to voters.

Field spending continues despite talk of retreat

Musk, who kept his distance from politics for many years, entered the arena by spending hundreds of millions of dollars for Donald Trump during the 2024 election.

Accompanying Trump on campaign trails, Musk subsequently took charge of the Department of Government Efficiency (DOGE), which sparked controversy through federal employment and budget cuts.

Musk stepped down from his White House role in late May 2025 and remained politically quiet for months following a public rift with Trump.

After announcing last May that he would sharply scale back his political spending, Musk told The Economist in a July interview that he had become overly involved in politics and had gone too far.

Despite those remarks, Musk pressed ahead with political activity in July by authorizing America PAC to spend between $100 million and $120 million on a fresh field operation aimed at driving conservative voter turnout in the 2026 midterms.

Having repaired ties with Trump following their public spat, Musk joined the US president on an official visit to China in May and was also present during Chinese President Xi Jinping’s visit to Washington last month.

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