The reliance on financial innovation has proved disastrous. In A Short History of Financial Euphoria (1994), John Kenneth Galbraith noted that: "Financial operations do not lend themselves to innovation. What is recurrently so described and celebrated is, without exception, a small variation on an established design . . . The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version."

Financially engineered growth extended into international trade flows. Since the 1990s, there has been a substantial buildup of foreign reserves in central banks of emerging markets and developing countries that became the foundation for a trade finance scheme.

Many global currencies were pegged to the dollar at an artificially low rate, like the Chinese renminbi, to maintain export competitiveness. This created an outflow of dollars (via the trade deficit driven by excess US demand for imports based on an overvalued dollar). Foreign central bankers purchased US debt with dollars to mitigate upward pressure on their domestic currency.

The recycled dollars flowed back to the US to finance the spending on imports. Foreign central banks holding reserves were lending the funds used to purchase goods from the country. The exporting nations never got paid, at least not until the loan to the buyer (the vendor finance) was paid off. Essentially, growth in global trade was also debt fueled.

Moderate debt levels are sustainable, provided the value of the asset supporting the borrowing is stable and significantly higher than the amount of the loan. Either the borrower or the collateral for the loan must generate sufficient income to service and repay the borrowing. In the frenzied market environment of low interest rates and ever-rising asset prices, the level of collateral cover and ability to service the loans deteriorated sharply. In 2005, rising interest rates and a cooling in the US housing market set the stage for the GFC.

The GFC was the reality on which the fake pleasure of the so-called Great Moderation and the Goldilocks economy were smashed. This reminds me  of Sigmund Freud's remark about illusions, which "commend themselves to us because they save us pain and allow us to enjoy pleasure instead." Freud understood that pleasant illusions come at a price, remarking: "We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces."