Last November we published a report, Walking the Path to the Next Global Financial Crisis.

Public debt ratios in many major economies are alarming. “Never before has the world economy been so indebted”, The Economist, a UK magazine, wrote last week.

Unprecedented loose money has artificially reduced interest rates. (See this week’s chart of the week in Insights newsletter, on the relative decline in the public interest bill).

The situation is unsustainable and looks dangerously unstable.

Developments this year reinforce these concerns. Resurgent consumer price inflation bolsters our stagflation scenario.

Central banks are now in a bind. They cannot keep interest rates low and meet their inflation targets. "The era of super-cheap money is over", wrote The Economist.

Increased inflation expectations reduce bond prices. That increases bond yields. Tighter monetary policy increases them further in the short term. That adds to bond investors' losses.

Omicron and the potential conflict over Ukraine threaten income growth expectations.

Higher borrowing costs and weaker economic growth threaten asset prices generally. Since the beginning of the year, the S&P 500 has fallen almost 7.3%.

Widespread pain lies ahead for lenders and borrowers. The risk our report identified - of another Great Depression - continues.

The Reserve Bank of New Zealand seems oblivious to these pressing risks. Its November 2021 Financial Stability Report ignored them. Instead, it devoted an entire section to speculating about distant climate change risks.

Other central banks are also contriving to make this case. Their drive to regulate in advance of convincing evidence is a bad look. What are their real motives?

Regardless, the issue is a distraction from the 'here and now' problem described above.

There are some positives, though. First, asset prices have not collapsed.

Second, higher interest rates are good for lenders to the degree that they are bad for borrowers. The combined purchasing power remains unchanged.

Third, real interest rates on government bonds remain low, promoting real investment. Lower expected future capital gains should also help lower house prices.

However, the inflation breakout is only the first puff of a storm to come.

Read our report Walking the Path to the Next Global Financial Crisis here.