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.

Argentine President Javier Milei has sparked a major diplomatic crisis with Brazil after making scathing remarks directed at President Luiz Inácio Lula da Silva and senior Brazilian officials during a visit to the country, prompting Brasília to recall its ambassador to Buenos Aires.

The Brazilian Ministry of Foreign Affairs announced the recall of Ambassador Julio Bitelli for consultations on Sunday, just one day after Milei attended an event in São Paulo where Senator Flávio Bolsonaro, son of former President Jair Bolsonaro, was formally endorsed as a presidential candidate.

Speaking at the Saturday rally, Milei targeted President Lula directly, accusing the Brazilian leader of being a “thief” and a “criminal,” among other allegations.

Milei also directed harsh language at Federal Supreme Court Justice Alexandre de Moraes, calling him “trash” after the magistrate denied the Argentine leader’s request to visit Jair Bolsonaro. The former Brazilian president is currently under house arrest, serving a 27-year prison sentence for his role in an attempted coup d’état.

The head of the Federal Supreme Court, Justice Edson Fachin, condemned the remarks, stating that Milei’s comments constituted “disrespectful language directed at a judge of the country’s highest court on Brazilian soil.”

Following the public outburst, a spokesperson for the Brazilian Ministry of Foreign Affairs confirmed that Ambassador Bitelli had been summoned back to Brasília for consultations.

The escalation drew swift condemnation from Argentine political figures across the opposition spectrum. Former Argentine President Alberto Fernández posted a video on X on Sunday detailing Milei’s remarks.

“Milei went to Brazil screaming like a madman and demanding to visit an imprisoned coup plotter. Insulting the president of a sister nation and our most vital trading partner is unforgivable,” Fernández wrote.

Concurrently, Axel Kicillof, the governor of Buenos Aires province and a prospective candidate in Argentina’s upcoming general elections, announced on X that he had contacted Brazilian Foreign Minister Mauro Vieira to clarify that “Milei does not represent the feelings of the Argentine people.”

Kicillof expressed “deep shame at watching President Milei humiliate and insult the Brazilian government, its president, and the entire nation,” adding that the province of Buenos Aires remains committed to regional integration and respect for allied nations.

Highlighting Brazil’s status as Argentina’s primary trading partner, Kicillof warned that “with these provocations, Milei is jeopardizing investments, exports, thousands of jobs, and broader Argentine interests—all to endorse a candidate at the behest of Trump.”

President Lula has so far refrained from responding directly to Milei’s personal attacks. However, in an opinion piece published Sunday in The Washington Post, where he criticized US tariffs on Brazilian goods as a “strategic mistake,” Lula stressed national sovereignty.

“Brazil’s destiny will be determined solely by Brazilians, without external interference and without submission,” Lula wrote.

The political clash coincides with heightened diplomatic friction between Brasília and Washington. The Brazilian Ministry of Foreign Affairs recently denied visa applications for two US Department of State officials planning to travel to the South American nation next week. The ministry offered no official explanation for the rejection.

Lula is seeking re-election in the upcoming general vote, where he is expected to face Senator Flávio Bolsonaro, whose family maintains close ties to the administration of US President Donald Trump.

The relentless rise in US Treasury yields indicates that a significantly higher return is now required to convince investors to lend their capital.

According to Axios, this trend reflects a new global economic reality. Unlike previous bond sell-offs driven by inflation fears, the current environment stems from a world where governments and corporations are scrambling to secure vast sums of capital to finance expanding fiscal deficits, artificial intelligence infrastructure, and other major capital commitments.

This fierce competition for capital is forcing borrowers to offer higher returns. The positive takeaway, according to Axios, is that inflation expectations appear well-anchored, suggesting these developments will not trigger an emergency response from the Federal Reserve.

However, the trend implies that policy benchmark interest rates will need to remain at elevated levels for years to come to maintain economic equilibrium.

Furthermore, this shift significantly complicates fiscal planning in Washington by raising the financing costs of an already expanding national debt.

For prospective home buyers, it signals that mortgage rates are unlikely to decline in the near term.

Even as Treasury yields have climbed, long-term inflation pricing in the bond market has remained virtually unchanged.

The 10-year break-even inflation rate—a market-based metric reflecting future inflation expectations—rose to 2.28% following the renewed escalation of conflict in the Middle East since late June.

Nevertheless, this figure remains below its early May peak of 2.5% and stays within a range fully aligned with the Federal Reserve’s long-term 2% inflation target.

Despite the relatively stable inflation outlook, Treasury yields have continued their upward trajectory. The 10-year yield crossed 4.7% this morning, reaching its highest level since last January.

The surge in real yields is even more pronounced at the longer end of the curve: the yield on 30-year Treasury Inflation-Protected Securities (TIPS) currently stands at 2.97%.

This marks the highest yield recorded for the security since its reintroduction in 2010.

Taken together, these dynamics demonstrate that investors are not merely pricing in higher inflation; rather, they are demanding higher real compensation to commit funds over the long horizon.

For much of the past two decades, bond market movements were driven primarily by inflationary trends and central bank policy interventions.

At present, however, the interest rate environment is being shaped directly by the dynamics of lendable funds: a limited supply set against a seemingly unlimited demand.

During the 2010s, global markets were characterized by an excess of capital chasing a scarce set of productive investment opportunities, maintaining historical lows for the cost of capital.

Today, the situation has reversed. Corporations are embarking on their largest capital expenditure boom in decades while governments run expansive budget deficits—with both competing for the exact same pool of capital.

As Axios notes:

“Consider Alphabet’s announcement to investors last night: the company raised its capital expenditure plans for this year by an additional $15 billion, with Chief Financial Officer Anat Ashkenazi noting that demand for computing capacity ‘still outpaces this investment.’”

If these elevated interest rates persist, the debt servicing costs of the US government will become far less manageable than currently projected.

Estimates published by the Congressional Budget Office (CBO) in February assumed that 10-year Treasury yields would average 4.1% this year and 4.3% over the subsequent few years.

According to CBO projections, every persistent 0.1 percentage point increase in interest rates over the next decade will add $379 billion to the government’s net interest expenses over that period.

Rough calculations suggest that if the recent yield trend persists, taxpayers will face approximately $1.8 trillion in additional interest costs over the coming decade.

There remains a possibility that this movement in the multi-trillion-dollar global bond market represents a temporary summer fluctuation.

However, the persistent spikes in yield rates suggest that a fundamental structural shift is underway across global capital markets.