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How the everything boom might end: The good, the bad and the ugly

Nearly every major asset market on earth is currently expensive by historical standards. You can read more about this phenomenon — the Everything Boom, or possibly the Everything Bubble — here. But what happens now? What does this simple fact, that globally prices are high and expected returns are low, mean for the future?

The answers fit into three broad categories: the good, the bad and the ugly. Here is what each possible outcome looks like.

The good

The most hopeful outcome for the global economy — and global asset prices — is that the low price of capital will help unleash productive new investments that create higher growth in the future — and that the economy will in effect grow into the current market valuations.

Companies could use their ability to borrow money cheaply or issue new stock on favorable terms to finance new inventions, new factories, new workers. Governments could use their ability to borrow cheaply to invest in infrastructure and education, increasing the longer-term productive capacity of the global economy. High prices for real estate in some of the most economically productive cities on earth could lead developers to put up more buildings there.

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If this future materializes, interest rates would presumably rise, meaning people who bought bonds at their current ultra-low interest rates could lose money. But that would probably happen gradually, and in the context of strong returns to stocks and other risky assets. After all, in this more prosperous future, corporate earnings would rise along with the economy.

In effect, this result would be one in which central banks' efforts to stimulate growth through cheap money policies (finally) have their desired effect, and once strong global growth arrives, everything else takes care of itself.

Read MoreWelcome to the Everything Boom, or maybe the Everything Bubble

The bad

People tend to assume that the current world of very low interest rates must be a short-term aberration. It's not necessarily so. Just ask the Japanese; 10-year government borrowing rates have been below 2 percent almost continuously for the last 15 years (they edged above that level one day in May 2006).

There are different names and explanations for it — a liquidity trap, a secular stagnation — and one of the great macroeconomic debates of our age is why this might be happening and what policy makers could or should do about it. But whatever you want to call it and whatever you believe its origins to be, the effects on the economy and markets are clear. It means continued low to nonexistent growth, low interest rates and low inflation. And the Japanese experience shows that it can persist for quite a long time.

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In other words, it could be that the era of low interest rates and low returns on investments doesn't end with an economic boom or with a collapse. It doesn't necessarily have to end at all. It may be that the world needs to buckle in for the kind of slow-growth, low-interest-rate world of the last few years for a long time to come.

The ugly

The two outcomes above appear the most likely. But we are in uncharted territory in many ways, and it is possible that the world may not work the way standard Keynesian economic models suggest it will.

In those models, for example, inflation can become a problem only when the economy is overheating. But what if the unconventional tools that central banks have used over the last half a decade have different results, causing, for example, a spike in prices even as the economy remains depressed? Then you could see bonds fall in value, but unlike in the "good" scenario above, not be accompanied by a rising economic tide.

Or, perhaps the large deficits that the United States and other countries have run during the crisis years will one day cause a crisis of confidence in advanced nations' debt. Interest rates could spike (and bonds could fall sharply in value, and probably other investments, too) not because the economy is recovering, but because of that loss of market confidence.

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Or maybe some external force will result in an economic downturn, which world economic policy makers would have few tools to fight after exhausting most of them over the last few years. If that happened, what would in normal times cause a mild downturn might instead bring about something more dangerous, like a new depression and market collapse.

Which of these is most likely? For the last few years, many official projections — forecasts from government agencies and bank economic research shops, for example — have tended toward the "good" outcome, predicting a full-throated expansion as being just around the corner. Many commentators, particularly on cable financial television, have predicted an "ugly" one, full of out-of-control inflation, debt crises and collapse.

But the pattern of the last few years shows that the "bad" scenario has been closest to the reality. That doesn't mean the rest of the bad script will continue in the years ahead, but it should prompt those predicting the first or third outcome to wrestle with why they have been wrong so far.

—By Neil Irwin, The New York Times