The news over the weekend was nothing short of grim.

The first Australian, a Perth man who had been quarantined on the beleaguered cruise ship in Yokohama, died in a Perth hospital from the effects of the coronavirus as cases reported here at home spread down the east coast.

America's first casualty died in a Seattle hospital, prompting the Governor of Washington state to declare a state of emergency, while more cases were reported that seemingly had no connection to international travel.

In Italy, meanwhile, Venice and other tourist favourites were near empty as the outbreak in Milan last week sent shockwaves across Europe, and sports authorities pondered whether to proceed with the Tokyo Olympics.

Global conferences from Sydney to San Francisco to Barcelona were cancelled as participants opted to stay home and perhaps participate online.

None of this bodes well for financial markets and unless health authorities can quickly contain the virus, investors will flee to safe harbours. They will continue to dump stocks and high-risk corporate debt and pile into government bonds and gold.

Last week was a torrid time for investors, as stocks took their worst beating since the global financial crisis in a belated reaction to an obvious threat.

While western governments are sheeting home the blame for last week's market carnage on the virus, a much more sinister and barely concealed problem lurks at the heart of our financial system.

On its own, a global pandemic such as this would be enough to seriously crimp economic growth and undermine stock markets. The virus, however, merely has been a catalyst to shake the foundations of a global stock boom built upon a mountain of debt.

Just as all that debt turbo-charged the boom, it now is likely to act as an accelerant in the decline.

Stocks shake-out spans the globe

No-one was spared last week. Our market dropped just shy of 10 per cent. Wall Street and Germany's DAX both shed 12 per cent, the FTSE in Britain fell 11 per cent and Japan's Nikkei was down 10 per cent.

For a little perspective, however, those declines on our market have merely taken us back to the levels we saw last August, illustrating just how hard the boom here has been running, even as our economy has been slowing. We've barely knocked a bit of froth off the top.

Despite rising unemployment, the toughest conditions in years for retailers, wages growth bordering on record lows and world record levels of household debt, the Australian market has forged ahead since Christmas.

Not even the catastrophic infernos that tore through much of the country over the summer could dent the enthusiasm of investors, pulled along by a surging Wall Street.

Until a week-and-a-half ago, market pundits were dismissing the virus. It merely was a temporary setback that would show up as a blip on global growth graphs.

That simplistic analysis ignores two key points:

The first is that China is fundamental to global growth. Not only is it the engine room of global manufacturing, it is a huge consumer market in its own right.

The first is that China is fundamental to global growth. Not only is it the engine room of global manufacturing, it is a huge consumer market in its own right. The second point is that Beijing has virtually shut down its economy in a bid to contain the virus. And it hasn't worked, with cases now spanning the globe.

Why has this blown up now?

It has suddenly dawned on traders that if developed economies are forced to take similar action, the global economy will take a massive hit. Company earnings will plummet and the vast ocean of US corporate debt may force companies big and small to the wall.

Corporate debt makes up a bigger percentage of the US GDP than it did before the GFC. ( Supplied: BIS/Wolfstreet.com )

It's not just the debt itself. Investors looking for decent yields as bank interest rates plummet have poured trillions of dollars into corporate debt markets.

It is not as though there haven't been warnings. Last October the International Monetary Fund warned that up to $US19 trillion of corporate debt could be "at risk" if there was a sudden downturn even half as severe as the 2008 global financial crisis.

Earnings wouldn't cover the interest bill and so companies could go to the wall, potentially igniting another financial crisis.

The problem with America's corporate debt isn't so much the size, it is that a large portion of the money has been squandered. Rather than investing in new plants and equipment, American companies have been raising cash and handing it straight back to shareholders.

Amazingly, one of the biggest driving forces behind Wall Street's longest boom has been American corporations themselves. They've been buying back their own shares.

It's a tax-effective way of delivering cash to shareholders and, as a neat little side-effect, all that extra demand for shares pumps up the share price. That's great for executive bonuses.

Not only that, given Wall Street loves to measure performance in earnings per share, reducing the number of shares gives the appearance that earnings are rising quicker than they really are.

In addition to that, American companies have been churning out huge dividends, much of it funded by cheap debt.

All that debt remains and must be repaid but there's precious little to show for it.

How corporate America spent the debt. ( Supplied: Yardeni Research, Standard & Poors )

How do we get out of this?

Uncertainty and fear is a deadly combination for financial markets. The coronavirus is providing the uncertainty, but debt is fuelling the fear.

The longer the virus remains uncontained, the more acute the damage to corporate earnings becomes and the greater the risk we will see company failures.

Clearly, ultra-low interest rates have been a major factor in fuelling the boom on global stock markets, but rate cuts and financial stimulus are the only weapons at the disposal of central banks. So, prepare for another round of interest rates cut here and across the globe.

As Wall Street endured yet another tumultuous trading session on Friday, US Federal Reserve boss Jerome Powell tried to soothe investor nerves with reassurances that "we will act as appropriate to support the economy".

Investors are forcing his hand. The market rate on US government bonds dropped to their lowest levels in history last week.

The same happened on the Australian bond market with two-year government bonds now well below the Reserve Bank's cash rate.

That leaves RBA chief Philip Lowe with a headache. He's been adamant that he would prefer not to cut rates. He's implored the Federal Government to abandon its surplus obsession and start spending. That was before the disastrous bushfires and COVID-19.

As he well knows, more debt simply leads to more problems down the track. But right now, it's the only vaccine in the first-aid kit.