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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

Updated 10 mins ago - World

Pentagon: 8,500 troops on high alert for possible deployment to eastern Europe

Photo: Anna Moneymaker/Getty Images

Defense Secretary Lloyd Austin has placed 8,500 U.S. troops on "heightened preparedness to deploy" to eastern Europe in case NATO activates its rapid-response force over tensions with Russia, the Pentagon announced Monday.

Why it matters: No decisions have been made to deploy U.S. forces, but the heightened alert level will allow the military to rapidly shore up NATO's eastern flank in the event that Russia invades Ukraine. The Pentagon warned that Russia has shown "no signs of de-escalating," and continues to amass troops on Ukraine's borders.

Alabama's new congressional map rejected by federal judges

The Alabama State Capitol in Montgomery. Photo: Taylor Hill/Getty Images

Federal judges on Monday night blocked Alabama's newly drawn congressional map and ordered the Republican-led State Legislature to create a new one that includes two districts, rather than the planned one.

Why it matters: "Black voters have less opportunity than other Alabamians to elect candidates of their choice to Congress," the panel of three judges wrote in their ruling.

Australian Open organizers reverse "Where is Peng Shuai?" t-shirt ban

Chinese tennis player Peng Shuai during the 2020 Australian Open in Melbourne. Photo: Bai Xue/Xinhua via Getty Images

Australian Open organizers on Tuesday reversed a ban on t-shirts supporting Chinese tennis player Peng Shuai following widespread criticism.

Why it matters: Tennis Australia's announcement came less than 24 hours after the governing body defended the decision to ask fans last Friday to remove "Where is Peng Shuai?" t-shirts, citing ticket policy prohibiting political clothing, per the BBC.