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Illustration: Aïda Amer/Axios

The world appears to be at a debt inflection point where traditional rules no longer apply.

Driving the news: Following a substantial increase of $21 trillion in 2017, debt accumulation rose by just $3.3 trillion in 2018, bringing "the global debt mountain to $243 trillion," the Institute of International Finance reported this week.

Why it matters: While economic orthodoxy holds that high levels of debt lead to higher interest rates, that correlation — like many others — is unraveling in the post-financial-crisis era.

  • "Many commentators might suggest that interest rates are low because central banks have made them low," David Page, senior economist at AXA Investment Managers, tells Axios. "Actually, it's the other way around. Central banks have had to lower rates as much as they have because the natural rate of interest has fallen" as a result of the growing debt.

The big picture: Over the past 10 years the money supply has increased significantly and wealthy businesses have used the wellspring of free cash to buy back shares and acquire rivals to inflate their stock price and reward executives.

But real wage growth has been flat in developed countries and largely capped in developing nations. That has meant a growing number of people have to take on more debt to finance the increasing cost of middle class necessities like a mortgage, medical bills and college tuition.

  • Both the increase in debt and lower interest rates "are symptoms of grander issues such as slowing population growth, an aging population and therefore an easing of economic growth rates," says Lou Brien, rates strategist at DRW Trading.

What it means for the market: The traditional tools of monetary policy by central banks no longer function as they once did.

  • "Central banks have cut interest rates in many places to 0% or negative levels and the economies are not accelerating," Robert Tipp, chief investment strategist at PGIM Fixed Income, tells Axios.
  • "Why are people not borrowing money at zero? Either they don't have anything to do with it or they are overly indebted."

The increased debt also means it takes lower interest rates to slow the economy. With a mountain of debt already accumulated, few can afford the 4% or 5% interest rates of the past, AXA's Page says.

Go deeper

28 mins ago - World

U.S. strikes Iran-backed militia structures in Syria

President Biden at the Pentagon on Feb. 10. Photo: Alex Brandon - Pool/Getty Images

The United States on Thursday carried out an airstrike against facilities in Syria linked to an Iran-backed militia group, the Pentagon announced.

The state of play: The strike, approved by President Biden, comes "in response to recent attacks against American and Coalition personnel in Iraq, and to ongoing threats to those personnel," Pentagon press secretary John Kirby said in a statement.

Senate parliamentarian rules $15 minimum wage cannot be included in relief package

Photo: Al Drago/Getty Images

The Senate parliamentarian ruled Thursday that the provision to increase the minimum wage to $15/hour cannot be included in the broader $1.9 trillion COVID relief package.

Why it matters: It's now very likely that any increase in the minimum wage will need bipartisan support, as the provision cannot be passed with the simple Senate majority that Democrats are aiming to use for President Biden's rescue bill.

Dave Lawler, author of World
48 mins ago - World

Biden's big Saudi reset

Mohammed bin Salman. Photo: Ryad Kramdi/AFP via Getty

President Biden spoke with Saudi Arabia's King Salman this evening ahead of the release of a CIA report expected to implicate the king's son, and the kingdom's de facto ruler, in the murder of a U.S.-based journalist, Jamal Khashoggi.

Why it matters: In one month, Biden has ended support for the Saudi war effort in Yemen, frozen a large arms deal and snubbed Crown Prince Mohammed bin Salman (MBS) by declining to speak with him directly.