The debts of the world capitalist economy and low profitability since 2009 have produced a Long Depression - where global growth remains below pre-crisis levels and growth in world trade has stalled. Companies confronted by low profitability and high debts are reluctant to invest. Governments are burdened with debts from bailing out the banks, and as social security costs remain high, they cut state investment. Households with large mortgages save rather than spend. So we have weak investment combined with low wage and employment growth.

Central banks have slashed interest rates towards zero so servicing debt is cheap. This low cost credit is used by corporations to buy back shares, pay dividends and speculate in stocks and bonds; governments to service their bonds and borrow more; and households to pay their mortgages and run up credit card debt.

However, the global debt hangover remains and if interest rates rise or economies suffer recession or deflation, this debt burden may spiral out of control.

The IMF reports that global debt is at record levels. Non-financial sector (corporations, households and governments) debt has more than doubled since 2000, reaching $152 trillion last year. And the total debt exceeds $200 trillion if we include banks.

These debts are equal to 225 percent of world GDP. Two-thirds of this are owed by the private sector, as household mortgages and corporate borrowing. The IMF identifies "a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown."

The IMF identifies European banks as a major risk. They face a chronic profitability crisis and hold legacy debts. Investors fear that profitability will continue to elude them.

Deutsche Bank, Germany's largest bank, faces massive fines from the American Justice department for "mis-selling" mortgage bonds to global clients during the U.S. housing boom. The subsequent bust helped provoke the global financial crash. Deutsche is close to the edge and it may be bailed out by public money. Last summer, an IMF report on German banks concluded that "Deutsche Bank appears to be the most important net contributor to systemic risks in the global banking system," followed by HSBC and Credit Suisse. Deutsche has $47 trillion in the notional value of their derivatives outstanding. If it goes down, many other banks will go with it.

Italy's banks hold €200bn in bad loans from companies that cannot service their debts in the midst of Italian economic weakness and sluggish global growth. Italy's third biggest and oldest bank, Monte Paschi, is bust and has already had two bailouts. Portuguese banks also had to be bailed out.

Corporate debt is rising, particularly in emerging markets. The combined shock of plunging commodity-prices and China's slowdown makes the surge in private debt a major threat to emerging-market economies.

The investment bank JP Morgan reckons that the debt of non-financial corporations in emerging economies rose from 73 percent of GDP in 2008 to 106 percent of GDP now; a rise of nearly 5 percent a year. This means there is a heightened risk of a severe financial crisis. And many emerging market economies have experienced a similar increase since 2007.

In the major economies, governments tightened spending to reduce public deficits and debt burdens, while central banks cut interest rates and printed money, creating cheap money to pay off debts and encourage investment.

However, fiscal "austerity" and cheap money have not worked; a zero interest rate policy (ZIRP) is being replaced by a negative interest rate policy (NIRP) and by quantitative easing (QE) - printing money to give it to the banks. Now, the idea is to have "helicopter money" which would be printed and distributed directly to governments or households as if being scattered from a helicopter. But all this credit will build up in banks and flow into speculative financial investment, because the profitability of productive sectors remains too low to encourage new investment and consequently growth.

Many international agencies and Keynesian economists are calling for "infrastructure investment," i.e. to build roads, bridges, communications etc. to boost employment and kick-start more rapid growth. It won't do the trick because investment in the capital sector is seven or eight times larger than government investment in most major economies (China and India are exceptions). And the willingness of governments to initiate such spending is constrained by concerns about rising public debt. The IMF puts public debt at 85 percent of world GDP. Low interest rates make it possible to service this debt now without stringent fiscal "austerity" (i.e. government spending cuts and tax rises). But large government investment will add to that debt.

So governments are refusing to follow Keynesian recommendations. Indeed, the IMF forecasts that budget balances will tighten all around the world. Morgan Stanley Bank does expect governments in advanced economies to relax fiscal policies next year, but only by 0.3 percent of GDP. This is equal to a $115 billion increase in spending. Such, "fiscal easing equivalent to 0.3 percent of GDP is unlikely to materially increase global growth," said Elga Bartsch, of Morgan Stanley.

The world capitalist economy is still drunk from too much debt and starved of profitability. And now that total corporate profits are falling globally - while debt continues to rise - the prospect of a new global slump is fast-approaching.

Heiko Khoo is a columnist with China.org.cn. For more information please visit:

http://www.ccgp-fushun.com/opinion/heikokhoo.htm

Opinion article reflected the views of their authors, not necessarily those of China.org.cn.