The third leg of the world's intractable depression is yet to come. If trade economists at the United Nations are right, the next traumatic episode may entail the greatest debt jubilee in history.

It may also prove to be the definitive crisis of globalized capitalism, the demise of the liberal free-market orthodoxies promoted for almost forty years by the Bretton Woods institutions, the OECD, and the Davos fraternity.

"Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out," said the annual report of the UN Conference on Trade and Development (UNCTAD).

We know already that the poisonous side-effect of zero rates and quantitative easing in the US, Europe, and Japan was to flood developing nations with cheap credit, upsetting their internal chemistry and drawing them into a snare. What is less understood is just how destructive this has been.

Much of the money was wasted, skewed towards "highly cyclical and rent-based sectors of limited strategic importance for catching up," it said.

Worse yet, these countries have imported the deformities of western finance before they are ready to cope with the consequences. This has undermined what UNCTAD calls the "profit-investment nexus" that ultimately drives growth and prosperity.

The extraordinary result is that some countries are slipping backwards, victims of "premature deindustrialisation". Many of them have fallen further behind the rich world than they were in 1980 despite opening up their economies and following the global policy script diligently.

The middle income trap closed in on Latin America and the non-oil states of the Middle East a long time ago, but now it is beginning to close in such countries as Malaysia and Thailand, and in some respects China. "The benefits of a rushed integration into international financial markets post-2008 are fast evaporating," it said.

Yet the suffocating liabilities built up over the QE years remain. UNCTAD says corporate debt in emerging markets has risen from 57pc to 104pc of GDP since the end of 2008, and much of this may have to written off unless there is a world policy revolution.

"If the global economy were to slow down more sharply, a significant share of developing-country debt incurred since 2008 could become unpayable and exert considerable pressure on the financial system," it said.

"There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market," it said. 

David Fuller's view

I am not a fan of acronyms, especially the long ones, beloved by nerdy backroom types.  To lessen readers’ possible frustration, UNCTAD, stands for United Nations (that’s the easy part) Conference on Trade and Development (the cumbersome part). 

I am not sure why AEP, one of the best financial journalists in the business, decided to share parts of this UNCTAD with us.  Perhaps it is an indirect caution against overconfidence regarding Brexit.  He did warn us shortly after the referendum result, as I recall, that the Brexit process would be challenging over the medium term, before the advantages were realised. That was a sensible comment, I felt.  Brits need to stay focussed and work hard, in order to redevelop a fully independent and internationally oriented UK. 

What about the UNCTAD report?

In an uncertain and ever changing world, it is not difficult to depress and even paralyse ourselves by focussing on all the economic factors which could go badly wrong.  UNCTAD has produced a left-wing splat report.  These play on our masochistic anxieties and are therefore taken more seriously than extremely bullish reports, which are often regarded as wishful thinking or even attempts at market manipulation. 

 I agree and stock markets would like it, at least initially.  However, government bond markets would provide early warnings as increasing GDP growth and rising inflationary pressures drove fixed interest yields higher.  That bearish move would eventually trigger another cyclical bear market for equities as central banks tightened monetary policy by raising short-term interest rates.  That sauve qui peut would create another buying opportunity. 

Here is a PDF of AEP's column.