A Strange Duality in Today’s Economy
Look closer at today’s global economy, and a peculiar duality emerges.
While the U.S. labor market is slowing, government debt has climbed to historic levels, inflation remains stubborn, and geopolitical tensions are escalating — equity markets are trading near record highs.
This apparent contradiction is hard to grasp. How is it possible that stocks keep breaking records while the real economy weakens?
The U.S. Labor Market: When the Engine Stalls
For years, the U.S. labor market was a pillar of strength — job creation and low unemployment supported consumption and growth.
Now, however, a clear shift is underway: in August only 22,000 new jobs were created, the weakest data since the pandemic. Unemployment rose to 4.3%, and previous months’ data were revised downward. This is not a one-off slip, but a trend of weakening.
And yet markets responded with optimism. Investors’ logic is simple: weak labor data increase the chance of Fed rate cuts. The old “bad news is good news” logic lives on.
Rising Stocks Amid Growing Uncertainty
The S&P 500 and Nasdaq hover near record highs, led by technology giants — especially those profiting from the AI boom.
Bond yields have retreated from elevated levels: two-year notes trade near 3.5%, ten-year around 4%, while the 30-year briefly hit 5% before closing near 4.76%.
Gold prices are hitting records as well, showing that investors are both seeking risk in equities and fleeing to safe havens at the same time. Confidence in the U.S. dollar is fading.
Liquidity: The Invisible Catalyst
Equity markets are not driven by fundamentals, but by liquidity.
The Fed’s Reverse Repo balance has collapsed from $2.5 trillion in 2022 to just $21 billion.
Meanwhile, the U.S. Treasury has sharply increased buybacks in 2025: the quarterly liquidity buyback cap rose to $38 billion, with an annual $150 billion cash-management framework. This year’s schedule shows a clear acceleration compared to 2024.
These measures artificially feed the system. Fed officials already warn that bank reserves are near critical levels. Another shock could easily trigger a liquidity crisis.
Public Debt: The Iceberg
One of the greatest threats to the global economy is sovereign debt. The numbers speak for themselves:
U.S. gross public debt exceeds $37 trillion (~120% of GDP).
Italy is at 140% of GDP, France ~115%.
Japan remains at ~230–240%.
China faces deepening local government debt problems.
All this is unfolding in a high-interest environment, with growing issuance and shrinking natural demand. An unstable mix for the long run.
Inflation: Stubborn and Political
Though down from 2022 peaks, inflation continues to weigh on economies.
In the U.S., service prices remain sticky.
In Europe, energy and food remain problematic.
In emerging markets, currency weakness could spark new inflation waves.
Central banks are trapped: loosen too fast, and inflation returns; keep rates high for too long, and recession hits. Stagflation is a real possibility. Meanwhile, political interference in monetary decisions is growing — never a good omen.
Geopolitical Risks
Economic fragility is compounded by geopolitical turmoil:
The Russia–Ukraine war drags on, with Putin warning NATO that peacekeepers would be “legitimate targets.”
China has launched an active diplomatic offensive, welcoming Putin, Kim Jong Un, and Modi — building a new bloc.
A loose but increasingly active coalition of China, Russia, Iran, and North Korea has emerged.
Middle East tensions in the Red Sea and Hormuz Strait threaten global trade.
The result: disrupted supply chains and volatile energy prices.
What Leading Economists Say
Stephen Roach (Yale, former Morgan Stanley Asia head) warns that a double shock — Middle East oil disruptions plus U.S. trade wars — could push the global economy into recession.
Neil Shearing (Capital Economics) describes 2025 as the start of a “Fragmented Era”: the end of globalization, with the world splitting into competing blocs.
Christine Lagarde (ECB) highlights the erosion of central bank independence as a major risk, citing Turkey’s hyperinflation as a cautionary tale.
Kathy Bostjancic (Nationwide) sees likely Fed cuts of 75 bps this year but warns that too much easing could reignite inflation.
Larry Summers stresses fiscal irresponsibility: without deficit control, monetary policy alone cannot tame inflation.
Paul Krugman cautions against complacency: “The global economy is not in immediate crisis, but this moment eerily resembles the pre-2008 years.”
Ray Dalio warns of a looming debt crisis if deficits don’t fall below 3% of GDP, alongside risks from U.S. political instability and trade wars.
Despite different angles, all agree: the current situation is unsustainable.
Reflexivity: When Markets Shape Reality
George Soros’ theory of reflexivity fits perfectly here: markets are not just mirrors of fundamentals, but shapers of them.
If investors believe the Fed will cut rates, markets rise — boosting confidence and spending. A weak jobs report can paradoxically lift equities.
This self-reinforcing cycle continues — until reality turns and perception collapses. The gap between market optimism and economic fundamentals widens. Eventually, one side must adjust.
The Core of the Paradox
To sum up:
Weak fundamentals (labor market, debt, inflation, geopolitics).
Stubborn inflation, central banks trapped.
Equity markets at record highs.
Liquidity, not growth, drives the rally — but liquidity shows signs of drying up.
Illusions of safety persist, yet experts from Krugman to Dalio warn against complacency.
The gap between market optimism and economic reality is visible from the Moon — but it cannot last forever.
The only real question is: what breaks first — the markets or the economy?