Financial market indicators suggest the global economy's condition is brighter than an examination of the real economy would suggest.
Following the economic downturn in 2007-08, liberal injections of taxpayer cash avoided catastrophic failure and resulted in a modest recovery. Governments ran large budget deficits in the period after the crisis. Interest rates around the world were reduced to historic lows, zero or negative in many developed countries. Balance sheets of major central banks have increased to US$18 trillion from around US$6 trillion, an unprecedented 30 per cent of global gross domestic product (GDP).
As evident from the anticipation of and reaction to decisions by the U.S. and European central banks to provide further support, the global economy is now addicted to monetary heroin.
The U.S. is in marginally better condition than others -- the "cleanest dirty shirt" is the expression that comes to mind. But despite a US$1 trillion annual budget deficit (six per cent of GDP) and expansionary monetary policy, growth is a tepid two per cent.
The housing market's rate of descent has slowed but prices remain 30 to 60 per cent below highs.
New housing starts have stabilized, at around 50 per cent below peak levels. Benefiting from a weaker dollar, manufacturing has improved. Lower oil and natural gas prices have benefited the economy.
Employment remains weak. Consumer spending remains patchy. Job insecurity, lack of earnings and wealth losses are causing households to reduce spending and repay debt.
Record corporate profits have been achieved mainly through cost reductions and minimal revenue growth. Investment is weak due to the lack of demand.
Bank lending is sluggish due to lower demand for credit and problems of financial institutions.
Federal public finances remain unsustainable. Cuts in spending, mandated under the 2011 increase in the national debt ceiling, would improve deficits but adversely affect growth. State and municipal finances are under severe stress, with an increasing number of borrowers filing for bankruptcy.
Europe remains trapped by high debt levels, budget and trade deficits, social spending inconsistent with tax revenues, poor industrial competitiveness (with some exceptions), a rigid monetary system and inflexible currency arrangements.
This is compounded by weaknesses of the European banking system with large exposure to sovereign bonds issued by peripheral nations.
Intellectually and institutionally, Europe is unable to deal with its debt crisis. Europeans believe stabilization and recovery can be achieved through greater integration.
Even if issues of national sovereignty can be overcome, integration will not work. The monetary arithmetic of European debt problems is that the EU and Germany, its main banker, does not have enough funds to rescue the beleaguered eurozone members.
Austerity dooms Europe to a prolonged and severe recession as the debt burden is worked off. The alternative, a debt writeoff, would result in significant loss of wealth for the mainly northern European lenders, triggering an economic contraction and prolonged period of economic stagnation.
Japan is in a state of advanced atrophy. Its primary investment merit is that almost all possible man-made and natural disasters have happened and the worst is factored in.
The BRIC (Brazil, Russia, India, China) nations are unlikely to be able to offset weakness in more-developed economies.
China's growth is slowing rapidly. India and Brazil have also lost momentum, with growth weakening. Russia is dependent on high energy prices.
BRIC weakness is a function of lower demand from developed countries reducing exports and weaker commodity prices.
The withdrawal of European banks that are historically major lenders to emerging markets has decreased the flow of money to countries needing foreign investment.
Emerging markets show signs of the developed world-credit virus. A rapid expansion of domestic credit in China, Brazil, eastern Europe, Turkey and India will result in banking-system problems. The combination of external and internal weaknesses threatens emerging economies, naturally prone to serial crises.
Most importantly, necessary structural changes have simply not occurred.
Borrowing levels remain unsustainable. Debt levels for 11 major nations have increased to 417 per cent of GDP in 2012 from 381 per cent of GDP in 2007.
Debt has increased in Canada, Germany, Greece, France, Ireland, Italy, Japan, Spain, Portugal, the U.K. and the U.S.
Global imbalances -- major current account surpluses and deficits -- remain. Little progress has been made in bringing the banking system under control.
The global economy has a serious chronic condition with limited prospects for a full cure. It exists in a no- or low-growth state. The threat of a sudden life-threatening seizure cannot be discounted.
Financial markets and investors seem strangely oblivious to the reality and risks and are taking rock star Steven Tyler's advice: "Fake it until you make it."
Next time: The Global Economy: Policy paralysis.
Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money and is a consultant to Jory Capital.