The author is the chief global strategist of Morgan Stanley Investment Management, and the author of “Ten Rules for Successful Countries”

The big mystery in the global economy is that although inflation is rebounding strongly, long-term interest rates have hardly changed in recent months.

So far, analysts have interpreted this strange market behavior as a symptom of a pandemic, due to fears of another surge in cases, or large-scale asset purchases by the central bank, or-most importantly-the belief that current inflation is soaring. Is temporary.

According to recent data, none of these explanations are tenable, but one explanation is tenable: the world is in a debt trap.

In the past four years, total debt has more than tripled, reaching 350% of global GDP. As central banks lower interest rates to recent lows, loose funds flowing into stocks, bonds and other assets have helped to quadruple the size of global markets from the same size as global GDP. Now the bond market may feel that the debt-ridden and inflated global economy is so sensitive to interest rate hikes that any significant interest rate hikes are unsustainable.

Of course, if all standard interpretations are disintegrated, then something deeper must have happened. Although the number of Covid cases continues to increase, concerns about its economic impact have given way to the assumption that vaccines and new treatments will make Covid a normal part of life like the flu. Global data shows that consumers are exiting shopping and going to restaurants at levels close to pre-pandemic levels.

At the height of the crisis, the Fed purchased 41% of all newly issued Treasury bonds, but even after the Fed and other central banks started their operations, long-term yields were still close to historical lows Early autumn signal They plan to reduce purchases. In addition, the central bank is buying bonds of all maturities, so why is it now only increasing interest rates for short-term bonds?

This is where the inflation scenario emerges-either the current surge will pass as the supply shortage caused by the pandemic eases, or the world is entering an era like the 1970s, where inflation is embedded in the system and people’s psychology.

There is growing evidence that inflation is not as “short-lived” as the central bank has always insisted. Attention is focused on headline inflation, which set a three-year high of over 6% in the United States last month. But the core inflation indicator-which does not include volatile prices such as food and energy and serves as a better indicator of long-term trends-has soared globally and currently exceeds 4% in the United States. Wages are also facing long-term upward pressure: every unemployed American now has more than six job vacancies, which is the highest level in two years.

Earlier this year, there were reasons to hope that the increase in productivity would continue to curb inflation in the long run, but this hope has faded. The survey shows that people who work from home spend longer to produce the same level of output.

The global bond market begins to digest inflation and economic growth will force the central bank to raise expectations of short-term interest rates starting next year. In fact, soaring short-term interest rates are sending the global government bond market into its worst-year return since 1949.

However, the yield on 10-year government bonds is now much lower than the inflation rate in every developed country. The market may intuitively believe that, regardless of recent inflation and economic growth, in the long run, interest rates will not rise because the world is heavily indebted.

As financial markets and total debt as a share of GDP continue to grow, they become increasingly fragile. Asset prices and debt servicing costs have become more sensitive to interest rate hikes and now pose a dual threat to the global economy. In past tightening cycles, major central banks have generally raised interest rates by about 400 to 700 basis points.

Now, more moderate austerity policies may put many countries into economic difficulties. Over the past two decades, the number of countries with total debt accounting for more than 300% of GDP has increased from six to two, including the United States. Significant interest rate hikes may also curb asset price increases, which usually also cause deflation in the economy. These vulnerabilities can explain why the market seems to be so concerned about the “policy error” scenario where the central bank is forced to raise interest rates sharply, dragging down the economy and ultimately pushing down interest rates.

In fact, the world has fallen into a debt trap, which shows that although the rejection of a large increase in long-term interest rates is new and unexpected, it may also be completely rational.