Kiwis came off lightly in the last GFC. Will it be a story more like Iceland, Ireland or Greece the next time around?

So what are the risks? If the world had another global financial crisis, would New Zealand be directly in the firing line this time around?

It might seem an odd question to raise right at the moment. On the surface, the world economy appears to be ticking along reasonably well. Some commentators are even describing it as an eerie calm.

Inflation is low, stocks are high. China is chugging along at a 6.6 per cent GDP growth rate. Even President Trump's promise he could push the United States to 4 per cent growth is coming true this year.

America drives the world. And as Paul Tudor Jones, one of its legendary hedge fund billionaires, noted recently: "We have the strongest economy in 40 years, at full employment. The mood is euphoric."

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However tune into the macroeconomic chatter and there is an underlying unease.

Part of it is that it has been a decade since the last big bust – the Great Recession, or global financial crisis (GFC) of 2007 to 2011. The next one always comes around.

But more to the point, the International Monetary Fund (IMF) and other central banking institutions have been warning the world economy never properly recovered from its last crisis.

The short story is the damage was only contained by the most drastic measures – zero interest rates and quantitative easing. A bail-out of the system using artificially cheap money.

Yet instead of this injection of liquidity bringing the world steadily back to healthy growth, the concern is the cash has been mostly diverted into blowing up asset bubbles – principally overpriced houses and over-valued stocks and bonds.

In a report earlier this year, the IMF said the global economy now carries more debt than it did even when it was struck by the GFC.

This is a problem if a prolonged period of free lending has been finding its way into essentially empty activities, such as speculative apartment block developments in Sydney or Dubai, rather than productive new business.

So the numbers might look fine. But are they based on anything substantial? How thin is the ice?

123RF The new story is how zero interest rates and quantitative easing may have created an illusion of growth.

In August, the US stock market managed to extend its remarkable post-GFC bull run to a record nine and a half years. Another good sign.

However analysts, like Guggenheim Investments' Scott Minerd, say the US index is loaded with "zombie" corporations which are only surviving because they can continue to borrow cash at a trivial interest rate.

Talking to CNBC, Minerd said those companies are now using President Trump's April corporate tax cut gift – a 35 per cent to 21 per cent reduction – to mount share buybacks.

Seeing no real growth to invest in, firms are preferring to pump up their stock price rather than invest the tax breaks in new factories or other expansion.

This is one reason a US stock market reckoning may be delayed, says Minerd. Buybacks should prop it up until at least 2019. Yet the resulting correction could be even bigger – a 40 per cent collapse, he says.

If the finger isn't being pointed at the hollowness of the surge in US stocks and bonds, then it is China which is the economic miracle that could cave at any moment.

The IMF report warning on returning record debt levels notes that China is responsible for 43 per cent of all the post-GFC increase in borrowing. It is the concentrated risk. And who knows what is going on inside its state-managed system?

Geof Mortlock, a former New Zealand Reserve Bank official and now a Wellington-based international risk consultant, says it feels impossible to get a true picture of China's financial stability.

"The opacity of its macro-data worries a lot of people. The fact it can crank up its monthly and quarterly GDP numbers with such remarkable timeliness questions how real is it?"

Mortlock says the plausible scenario would be US stocks getting found out, then China – along with all of Asian banking – getting dragged down into a general global collapse.

And this time, it would be a short step to a severe test of the Australasian financial system, he says.

Everyone knows Australia and New Zealand got off lightly during the last GFC because China pulled us through with its demand for commodities like iron, coal, and agricultural products. Since then, it has been feeding our tourism booms.

EMILIO MORENATTI/AP PHOTO Greece suffered the delayed impact of the GFC in 2015. Bank customers queue just to get weekly €120 allowed.

However Mortlock says if China goes under, that will run smack into our overheated property market and record level household debt.

"Housing prices look insane by conventional metrics. Household leverage is extraordinarily high – higher than pre-GFC. No lessons have been learned."

So start thinking Greece, Ireland or Iceland if another GFC hits. "It would wash up on our shores pretty smartly through a number of channels," Mortlock concludes gloomily.

WEANING THE WORLD OFF ZERO INTEREST

Of course the pundits can only guess, especially about any actual date for when the financial system might suddenly buckle.

There was in fact a test of global stability in February when US stocks had a major 4.6 per cent wobble. But that was shrugged off and all the lost ground has since been regained.

Yet two things are of deep concern to macroeconomic experts. The first is the lack of central bank ammunition to fight any new GFC.

The other is the possibility that an economic malaise, a general long-term stagnation, might have become the new norm. Growth itself might be at the end of its cycle.

What seems certain is that another downturn will not be a simple repeat of the GFC.

Looking back, much of that was the result of a sudden loss of confidence inside the heart of global banking itself.

Lax regulation had allowed the world financial system to become flooded with risky derivative contracts. Clever traders had invented all kinds of fancy new ways to repackage debt – mainly dodgy subprime home loans in the US – and make it look like solid investment products.

The credit crunch of 2007 was the moment world banking froze because rival banks could no longer trust each other in their day-to-day dealings. Every trade might be an attempt to palm off a toxic derivative.

ANDREW GORRIE/STUFF Gareth Kiernan of Infometrics: The world's central banks have been actively managing things since 2008.

Gareth Kiernan, chief forecaster for Wellington's Infometrics, says the central banks had been guilty of running the system with too light a hand. There had to be a stop and reset while everyone figured out where the poison actually lay.

But Kiernan says since the GFC, the regime has been overhauled. "The central banks are taking that oversight role they're suppose to have a lot more seriously."

Satyajit Das, a Sydney-based derivatives expert, points to new safeguards such as the Volcker Rule in the US, which has stopped excesses like banks using customer deposits to gamble in the derivatives market.

Derivatives themselves are now meant to be traded openly on an exchange and insured by central counter-party (CCP) deals that can back up a shortfall if one side falls through.

Das is sniffy about these new mechanisms holding up if put to the test. They rely on complicated assumptions.

But generally the regulation and transparency has been put in place to minimise a panic simply because no-one knows how much liability has been concealed.

So the risk in 2018 has become the degree to which a decade of central bank control has only been papering over of the world's problems using cheap money. Is all the apparent bouncing back a debt-fuelled illusion?

Starting in 2008, led by the US Federal Reserve, the central banks did two things to reduce the cost of commercial borrowing to next to nothing.

The first was just to cut official interest rates. In a year, the Fed dropped from 5 per cent to 0.25 per cent.

New Zealand's Reserve Bank went into the GFC at 8.25 per cent, cut quickly to 2.5 per cent, and since 2016 has been sitting at 1.75 per cent. It was the same pattern all over the world.

The second trick was quantitative easing (QE) – a more roundabout measure. QE involves a central bank buying back huge sums of government-issued bonds or treasury notes from the market.

The idea is this floods the economy with ready cash that then has to find a home. High street banks get busy using it to issue cheap loans and rebuild confidence.

The combination of QE and zero interest rates was meant to be a short, sharp shock – enough to get the patient's heart beating again. However it turned into a decade of continuing stimulus.

The Fed did start trying to wean the US off a reliance on QE in 2013, saying it was going to begin selling its bonds stockpile back to the market. That led to the "Taper Tantrum", a mini-crisis which forced it to hold off.

In 2016, the Fed did finally make a move on its interest rates. In seven cautious increments, it has now got back to 2 per cent.

Yet it still sits on a boggling US$4.5 trillion in bonds bought under QE. There is a huge position to unwind.

SUPPLIED Satyajit Das, Sydney derivatives expert and author, sides with those who think economic growth is simply exhausted.

And with announcements the Fed intends to keep pushing on interest rates – inching towards 2.4 per cent in 2018, 2.9 per cent in 2019, and 3.4 per cent in 2020 – this is what is making stock market investors nervous.

In describing the current American mood as euphoric, Tudor Jones was in fact making the point the Fed is moving on while any actual economic recovery remains fragile.

In an advice letter to his hedge fund clients, Tudor Jones wrote the situation felt to him like Japan in 1989, or the US in 1999 – the previous times bull runs ended in spectacular wipeouts.

The rest of the world, particularly Europe and Japan, are deep into QE and nominal interest rates too. Unlike the Fed, they haven't even dared to begin their exit.

The most the European Central Bank (ECB) is promising, for example, is to stop taking on further QE by the end of this year.

So the equation is one of a world delicately poised. The central banks have run up a new mountain of debt to replace the old one the world had just ahead of the last GFC.

And now the dilemma is exactly what are the central banks going to do if it all goes pop? The emergency measures of slashing interest rates and spending on QE are still in place.

Mortlock, who works with the IMF and other international institutions, agrees the situation looks precarious.

"The bottom line is that when you look at central banks in all the jurisdictions, they have very little ammo left to combat a severe downturn."

Mortlock says think of all the other things everyone has got used to being stable, but which could just as quickly go out of whack – inflation, unemployment, exchange rates.

The danger is that the ice is thin. And the central banks can't come galloping to the rescue as they did the last time around.

STAGNATION AS THE NEW NORMAL?

This is where the macroeconomic analysis turns truly pessimistic. The world is sitting on another heap of debt. The system is out of stimulus. And perhaps the global economy just is set to stagnate.

It hasn't bounced back because it can't bounce back.

Some are blaming peak oil – the ending of a time of cheap fossil fuels. Analysts point out that much of the world's productive infrastructure was built when oil prices were less than US$20 per barrel.

And it is not just that basic energy costs are a drag on today's business returns. All the problems of a global-scale industrialisation – like climate change and environmental damage – are now a source of friction when it comes to bottom line profits.

Robert Gordon, a professor at Northwestern University in Illinois, goes even further in his book, The Rise and Fall of American Growth. Gordon argues the world has generally done its dash when it comes to the changes that have underwritten the growth of ordinary income.

He says the modern world was built during the "special century" from 1870 to 1970. That is when it saw all the real life bang-for-buck improvements, like flushing toilets, telephones, TV, central heating, antibiotics, cars and even office-based working.

From 2000 to 2015, despite the tech age, Gordon says US income growth slowed right down to 1.3 per cent. He expects it to fall to 0.7 per cent over the next 25 years.

Sydney derivatives expert Das has written his own book, The Age of Stagnation, which arrives at the same conclusion. He says a dollar of debt produced a dollar of growth in the 1950s, but by 2007, it took $5 to make a $1 return.

The model would seem to be Japan, which has been going sideways ever since it tanked in the 1990s, Das says. Growth is exhausted. That was the actual GFC message. And all that has been happening for the past decade is a game of "extend and pretend".

123RF Auckland housing prices are sky high, but does it count as a true bubble?

Hard words. But there are plenty who would point to the struggle by New Zealand to produce genuine productivity growth – the kind measured in average GDP per worker.

Local commentators such as Dr Ganesh Nana, chief economist at consultant Berl, and Bernard Doyle, a strategist at financial advisor JBWere, say New Zealand is as reliant on low-wage industries, like farming and tourism, as ever.

A decade of cheap borrowing and 5 per cent mortgages has made it possible to make up for that by living off higher debt. And immigration has been a boost to New Zealand fortunes. Letting more people in adds to gross GDP numbers.

But Doyle dubs this "population QE". He says it has only increased the size of the low-wage workforce when the goal needed to be creating better-paid employment.

REASONS NOT TO FEAR THE WORST

So there's plenty to worry about if the US stumbles and China chokes.

With Australia actually being New Zealand's largest trading partner, China going of course becomes a double whammy. We get hit by Australia getting hit. It all washes up on our shores.

But the question is how imminent is any disaster? Even the pessimists are saying it could all run on a few more years, simply because the central banks will be too afraid to withdraw their QE and interest rate props.

The Bank for International Settlements, for instance, is modelling a "snapback" of asset bubbles in 2022. Comfortably distant at the moment.

Then there are those like JBWere's Doyle who say there needn't even be a crash. Nothing is automatic. Doyle questions whether there even are asset bubbles right now.

"The fairest measure of a stock market bubble is the price per earnings ratio. And the current US P/E is 17 times earnings. In the 2000 tech bubble, it was 25 times."

Also the New Zealand housing market. Doyle says it isn't speculation that has driven up Auckland prices but a shortage of homes being built, a flood of immigration. There are good market reasons.

Doyle says the banks have also been imposing sensible lending restrictions. So he sees no doomsday scenario. If the big one were looming, past experience says there would be many more flashing red lights by now.

China has to be the worry, he agrees. Yet it has been demonstrating it can manage its own problems.

There was an alarming bubble in its stock market in 2016. "The Shanghai index went parabolic." But government action defused that. What we have learned is China can look after itself, Doyle says.

And it is not as if the world hasn't been tested every year since the GFC. There has been the Greek debt crisis, the Brexit vote, the election of Donald Trump. Enough potential triggers if you are looking for them.

"It has been a pretty eventful period," Doyle says.

Others, like Mortlock, remain less sanguine. They say global debt has returned to frightening levels. Growth feels hollow. The central banks have shot their bolt. And New Zealand is in the firing line this time around.

Perhaps the world may instead drift gently sideways into a long stagnation, rather than stumble into some truly global financial crisis.

However, dig deeper into the macroeconomic story and it could give you a few sleepless nights.