The global economy is nearing a crisis, the UN Conference on Trade and Development (UNCTAD) has warned.

“Alarm bells have been ringing over the explosion of corporate debt levels in emerging economies, which now exceed $25 trillion. Damaging deflationary spirals cannot be ruled out,” it said in its annual report.

The Telegraph relays:

We know already that the poisonous side-effect of zero rates and quantitative easing in the US, Europe, and Japan was to flood developing nations with cheap credit, upsetting their internal chemistry and drawing them into a snare. What is less understood is just how destructive this has been.

Much of the money was wasted, skewed towards “highly cyclical and rent-based sectors of limited strategic importance for catching up,” it said.

As a result of the world’s central banks’ inflationary monetary policies, the UNCTAD report says,

“There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market.”

The US housing bubble, of course, was caused by the Federal Reserve’s inflationary monetary policy, along with the government’s policy of encouraging homeownership.

The UN report warns that, this time, the consequences could be far more disastrous than the previous global financial crisis.

So what is UNCTAD’s proposed solution? The Telegraph reports,

Its prescription is radical. The world must jettison neo-liberal ideology, and launch a “global new deal” with a blitz of investment on strategic sectors. It wants a return of the “developmental state”, commanding a potent industrial policy, and backed by severe controls on capital flows.

“If policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward spiral for everyone,” it said.

In sum, the UN report acknowledges that government interventions into the market, and namely central banks’ inflationary monetary policy, have caused widespread malinvestment, and yet its solution is not to end government interventions and allow the free market to sort itself out, but to intervene in the market even more radically.

Such cognitive dissonance! This policy recommendation fits Einstein’s definition of “insanity”.

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