Danish philosopher Soren Kierkegaard said that life is understood backwards and lived forward. We look at history to guide us, but the only way to truly know the future is to live our lives. If our perception of reality is subjective, then what we experience is based on beliefs or judgments that can be detached from reality.

This term describes a market or system that looks big, sweet and attractive from the outside but is entirely hollow on the inside. Tett cites an Islamic finance scholar as the originator of the term: “Real assets – like houses – were being used to secure debt that was then rehypothecated multiple times, partly with derivatives, just as sugar is spun and re-spun into candyfloss.”

Estimates by the McKinsey Global Institute suggest that the global balance sheet grew faster than GDP in the 50 years from 1970 to 2020, with the pace of that growth steadily increasing. Most of this happened after 2000, when asset valuations and credit expansion detached from GDP growth. In other words, finance is like candyfloss, pumped up by credit and the belief that valuations can only keep rising.

In the candyfloss economy, financial engineering is prioritised over real engineering or production. Financial derivatives are created essentially through leverage, based on contractual promises secured on assets such as real estate. Derivatives can be created as long as there are buyers who believe in the product or the issuer.

The real danger in financial candyfloss is that buyers have a false sense of stability in values. Valuations gain momentum: they rise simply because more people believe they will continue to rise. But what goes up must eventually go down.