For nearly two decades, every credit crisis has been palliated with a further wave of leverage, kicking off a new economic cycle. Can this work again? I think not. In this post-credit crisis world, some things will be permanently different.

It will not be business as usual for government bond prices. That's because current bond yields and the increasing insolvency of our rulers are the biggest disconnect in financial markets today. This comes from two factors: “quantitative easing” by central banks and the collapse of credit demand by the private sector. Neither are permanent features of the economic landscape.

Some will note that, when Japan's bubble economy collapsed, it was able to run huge budget deficits and raise outstanding government debt from 60 per cent to 140 per cent of gross domestic product, while still experiencing a fall in bond yields from 8 per cent to 1 per cent. But this “miracle” was only possible because Japan's household savings were huge and invested at home. Japan did not need foreigners to fund its government deficits. Even today foreign ownership of Japanese debt is only 6 per cent compared with 50 per cent for US government paper.