Issue An elevated balance sheet unwinds through productivity, inflation, a reset, or not at all

Summary

MGI argues that a balance sheet out of step with the economy, with high paper wealth fuelled by debt and liquidity well above historical norms, can unwind in several ways. In productivity acceleration, higher incomes grow into high asset values and debt, a path the report likens to the US technology boom of the late 1990s and the only one that protects wealth. Sustained inflation instead shrinks the balance sheet relative to GDP through nominal growth, cutting the real value of assets and debt while eroding inflation-adjusted wealth, as in the US after the 1970s oil shock. A balance sheet reset brings falling asset prices, deleveraging, and defaults, with severe wealth losses and often a lost decade, as Japan experienced after its property bubble in the 1990s. Finally, the balance sheet may simply stay high under secular-stagnation-like conditions, as in the US and Europe in the 2010s, which looks good for wealth but costs growth and adds leverage.