A ccording to an old Wall Street joke, the longest river in the emerging-market countries is “De Nial.” Given recent comments by U.S. Treasury secretary Janet Yellen and International Monetary Fund Managing director Kristalina Georgieva about the “resilience” of the world economy, we must wonder if that Wall Street joke is more applicable to the policy-makers in advanced economies.

Cracks are surfacing in major parts of the world economy. As Germany, Japan, and the United Kingdom are either enduring or about to experience an economic recession, policy-makers in developed countries appear to be overly sanguine about global economic prospects. This heightens the chances that they will, once again, be caught asleep at the wheel when the global economy takes a turn for the worse.

Let us start with the United States, the world’s largest economy. Not only do U.S. economic policy-makers seem to be in denial about the commercial-property-market crisis and its effects on the banking system, they also deny the precarious state of the country’s public finances.

In a recent 60 Minutes interview, Federal Reserve chairman Jerome Powell assured us that the commercial-property-market crisis was “manageable,” and that it would not cause financial-market instability. Never mind that commercial-property prices could fall by 40 percent from their peak, or that roughly $930 billion in property loans are due this year at higher interest rates than those at which they were originally contracted. Never mind, too, that commercial-property loans account for nearly 20 percent of regional banks’ loan portfolios, and that these banks are already in a very weak position as a result of the large losses on their bond and loan portfolios due to higher interest rates. According to a recent National Bureau of Economic Research study, up to 385 small and medium-sized banks are likely to fail as a result of troubled commercial-property loans. 

Given Congress’s continued unwillingness to deal with the country’s dismal public finances, it seems that our policy-makers are in denial about the dangerous path on which our public finances are traveling. They seem unbothered that we are running a 6 percent of GDP-budget deficit at a time of cyclical economic strength. Moreover, the Congressional Budget Office is projecting that, on present policies, our public debt is set to comfortably exceed 125 percent of GDP — a level higher than that recorded at the end of World War II.

Similarly, policy-makers seem to be in denial in China, the world’s second-largest economy. They cling to the hope that the country’s economy will continue to grow at 5 percent a year, and that China will avoid a Japanese-style lost decade. Never mind that China’s housing and credit market bubble exceeded that which preceded Japan’s lost economic decade, and there is every sign that the Chinese property- and credit-market bubble has burst. In China, house prices are declining, property developers are defaulting on their loans, unsold houses are soaring, and strains are now appearing in the large shadow-banking system. It does not help that President Xi is oblivious to the fact that his revival of the command economy is diminishing domestic and foreign investors’ confidence.

European policy-makers seem to be in denial, too. In their case, it is about the risks that an incomplete euro zone project poses to that region’s long-term economic prospects. This is particularly relevant when Europe has its own commercial-property crisis, and debt levels in key euro zone countries (like Italy) are higher today than they were during the euro zone–debt crisis a decade ago. Absent the establishment of a euro zone fiscal and banking union, it must be only a matter of time before the euro zone experiences yet another sovereign-debt crisis.

All this suggests that U.S., Chinese, and European policy-makers should start recognizing the world economy’s important fault lines instead of trumpeting its resilience. Maybe then they would take action to repair those fault lines and spare the world economy from another hard landing.