By Abhi Chatterjee, chief investment strategist, Dynamic Planner
“Reality continues to ruin my life” Calvin, The Complete Calvin and Hobbes, Bill Watterson
Maybe the global economy, like Terry Pratchett’s Discworld, is held by four giant elephants standing on the back of a colossal sea turtle as it swims through space. That explanation would render it significantly more comprehensible than the opaque, twitchy and often outright furious manner in which it currently appears to operate.
One might, with a certain kind of misplaced, almost pathological optimism, assume a system this whimsical and complex would be wrangled by the rigorous, logical application of mathematics and millions of lines of intricate, data-gobbling Python code. One would also imagine a conspicuous button marked “ENTER” that, when pressed, would neatly lay out the fate of nations and financial markets in sensible tables and reassuringly coloured graphs. But the markets don’t work like that, do they? And yet we seem to be compelled to carry on writing about what might, quite literally, make it all fall over in 2026.
We owe, we owe, so off to work we go!
Sovereign debt – a modern financial equivalent of the four elephants holding up Discworld. The collective borrowing of the developed world has become less a calculated financial position and more a national hobby. The debt-to-GDP has soared to a point where nobody is taking the “GDP” part seriously anymore; it’s merely the denominator we use to make the numerator look slightly less terrifying. The IMF projects the average for “Advanced Economies” to be around 110.2% of GDP for 2025, with the G7 economies looking even more top-heavy.
What has it all been for? Well, it funds everything from social security and hospitals to those delightful, temporary tax cuts and the occasional very expensive war. But the bigger the pile, the bigger the bite. Deciding to repay it would mean that we would either need to grow the GDP at a serious clip or raise taxes and cut spending so deep that everything would seize up and everyone would riot.
So, for whatever short-term, politically convenient reason, our governments continue to add to this catastrophic conflagration-in-waiting. Therefore, as a contributing citizen, I am now engaged in my solemn duty: increasing the GDP as much as I possibly can, perhaps by purchasing two, slightly more expensive cups of coffee today. Every little bit helps keep the elephants from shifting their enormous feet.
So, working smarter, is it?
One might ask: why don’t we just work harder, deploy some truly aggressive cost-cutting measures, and finally build out that magnificent AI into everything? Surely, we could crank up the productivity dial, cut the interest rates to the bone and watch everything turn rosy? Ah, but that would require addressing the elephant in the room – or rather, the annoying, slightly smelly, permanent houseguest we call sticky inflation.
What is a central bank to do when the data insists on being boringly responsible? Why, change the management! If you are the US, you replace the stoic, measured figurehead with someone whose main qualification is a truly powerful media presence and a commitment to “economic optimism”. Across the pond, meanwhile, the UK and Europe have adopted the simple playbook: cut rates and pray. They’re throwing tiny monetary life preservers onto a tidal wave of geopolitical uncertainty, hoping cheap credit will somehow magically conjure productivity. This is less “monetary policy” and more “vibes-based economics”, where confidence is the true currency.
This is all happening atop the stark, glorious symmetry of something being described as a K-shaped consumer economy. At the top of the K, the tech elite and asset owners, fuelled by an endless bull market, who are thriving, spending and driving the aggregate consumption figures sky-high.
At the bottom half, the rest of us, desperately clinging to the next political confection – a “tariff rebate” or a “freedom stipend” – a fiscal boomerang designed to soothe the masses without fixing the underlying structural issues.
Finally, we have the magnificent risks joined in an unholy alliance: AI and private credit. The AI bubble is huge, and nobody cares. But the real risk lurks in the shadows: private credit. The financial system has outsourced its riskiest, most illiquid loans to a handful of massive, non-bank, lightly regulated funds. This is the financial equivalent of a nuclear reactor with all the safety features disabled – it generates incredible power, until it doesn’t. When the AI pie in the sky seems a little too high, the illiquidity in private credit could turn a small correction into a full-blown “What the heck was that!?” moment. And then the cheerful central banker will have to get truly creative.
A realisation strikes the risk-manager mind. It’s not the exciting “unknown unknowns” (volcanoes! aliens!) that pose the threat. The horror is that all the issues – the colossal sovereign debt, the stubborn sticky inflation, the split K-shaped economy, AI not being the panacea – are all, grimly, knowns. The central bankers are just playing catch-up. The variable is how it all unfolds.
In other words, it’s not whether all the elephants holding up the world will sneeze together, but which one gets spooked first by the proverbial mouse. What to do?
As ever, hold your nerve and stick with your trusted risk model. Now, if you’ll excuse me, I need a healthy dose of a robust, structural integrity-enhancing liquid.
A Merry Christmas and a Happy New Year to all!
