Thesis

The global economy in late 2025 is exhibiting clear signals of overheating as speculative capital flows concentrate in artificial‑intelligence, cryptocurrency and sovereign‑debt markets. These converge in a triad of bubbles flagged by global institutions, raising the risk of a correlated correction across advanced and emerging economies.

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1. Anatomy of the Bubbles

The World Economic Forum (WEF) recently identified three potential asset bubbles: in crypto, AI and debt. Reuters+2Investing.com Canada+2 Specifically, the AI rally is drawing comparisons to the dot‑com era: massive investment flows into generative‑AI firms with valuations decoupled from earnings suggest froth. World Economic Forum+1 Meanwhile, even though the private‑sector debt burden is easing, global total debt remains historically elevated. IMF+2IMF+2

In 2024, total global debt reached about 235 % of global GDP, marking stabilization but still far above pre‑pandemic levels. IMF+1 Within that, public debt approached 93 % of GDP globally; corporate and household borrowings are trending down but remain elevated in many regions. IMF+1

These conditions of abundant liquidity, low yields and investor herding create fertile ground for asset‐price excesses.

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2. Debt Overhang and Policy Distortion

The risk is compounded by policy distortions from years of accommodative monetary and fiscal regimes. Government borrowing has surged in the wake of the pandemic and energy‑shock responses, pushing public debt burdens higher in economies accounting for 80 % of global GDP. IMF+1 The International Monetary Fund (IMF) projects global public‑debt ratios could rise toward 100 % of GDP by the end of the decade in the absence of stronger growth or fiscal consolidation. Reuters+1

The confluence of high debt, low growth and rising interest‑rate risk creates a scenario where a shock in one dimension—say a tech valuation collapse—could transmit through fiscal channels into sovereign stress, especially in emerging markets.

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3. Sectoral & Sentiment Flashpoints

The chart‑topper sector is AI. While some analysts argue that the boom is underpinned by real productivity advances, others see the valuation gap as a warning sign. World Economic Forum+1 Global equity markets tied to the AI narrative are vulnerable to re‑rating if earnings disappoint or capital becomes scarce.

Cryptocurrency markets likewise remain speculative, and the WEF flagged them explicitly among bubble‑risks. Investing.com Canada+1 On the debt side, short‑term borrowing is rising. The Institute of International Finance (IIF) reported global debt reached a record ~US$338 trillion in Q2 2025, with emerging‑market debt at a new high. Reuters

Investor sentiment is also tilting. Retail and institutional flows into thematic funds (AI, crypto) create a “fear of missing out” effect, exacerbating the risk of a sharp reversal when the narrative breaks.

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4. Transmission & Global Risks

A correction in AI or tech equities could trigger a broader market retrenchment. Given the elevated debt and stretched valuations, the fallout could follow multiple channels: reduced private investment, tightened credit conditions, sovereign bond stress and perhaps capital‑flow reversals in emerging markets.

Emerging economies with high external borrowing or weak fiscal buffers are especially exposed. A sharp risk‑off episode could magnify fiscal risks, pushing already high debt burdens into distress. At the same time, geopolitical shocks — such as disruptions to supply chains or trade wars — could act as triggers given the asset valuations and debt structures are already fragile.

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5. Counterarguments & Stability Factors

Some argue the current environment represents a boom underpinned by structural change rather than a bubble. For example, AI investments may deliver productivity gains justifying high valuations, and central banks are more experienced than in previous cycles. World Economic Forum Moreover, not all asset classes are overheated — sectors like commodities or housing in many countries remain relatively steady.

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Forecast

Given the evidence, the likelihood of a multi‑sector correction in 2026 is elevated. If AI valuations falter, the stress may spread quickly to corporate credit and sovereign debt. Growth will likely remain modest (global GDP expected ~2.8 % in 2025) which reduces buffers against shocks. IMF

My base‑case: moderate correction (‑10 % to ‑15 % in tech equity indices) followed by tighter credit conditions and slower investment growth. A downside scenario: broader equity market drop (‑20 %+), tighter bond yields, and emerging‑market contagion, pushing some sovereigns into distressed territory.

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Counter‑View

If AI productivity gains accelerate and fiscal consolidation tracks ahead of forecasts, the correction may be muted. Central‑bank vigilance could contain spillovers, and selective valuation resets may lead only to sectoral adjustments rather than systemic failures.

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AI Transparency Note:
This article was prepared with the help of artificial‑intelligence tools and verified economic data. It does not contain investment advice.