The following diagram shows the relationship between the Money Supply, the Economy, Interest Rates and the Bond Market. Any surplus Money not required for short-term operations of any Commercial or other entity flows to the Bond markets, causing Rates to decline. A sustained surplus of Money with a growing Economy can cause severe Price Inflation as demand races ahead of supply. On the other hand a surplus partly caused by a contracting Economy can cause Deflation as demand declines with too much supply from over investment. When the Economy grows faster than the Money Supply, reserves are drawn from the Bond markets for short term operations causing Rates to rise. The system is inherently more stable when little Money Supply surplus exists, hence the advantage of a Gold based system restricting expansion to the mining capacity of civilization. When surpluses are present the system builds momentum, and can oscillate out of control periodically when conditions are right. The Federal Reserve was enacted to control the growth of the Money Supply through short term Interest Rates, but since it is composed of Bankers who profit from the expansion, they can be in conflict of interest.
The Debt to GDP ratio with Rates agrees with this model
The last 100 years of Debt, GDP and Rates demonstrates these concepts clearly. Starting in 1925 Debt grew quickly while the Economy had most likely started contracting in 1920 as shown by the drop in Rates before the rise in Debt and Money Supply in 1925. All this extra Money flowed into Bonds and Rates did not start to rise until most of the Debt had Defaulted and was retired. Then after the war, the Economy grew very fast and the Money Supply could not keep up causing Rates to rise until Commerce and Bankers felt confident enough to increase Debt and Money Supply starting in the early 1980′s. Since then Debt and Money Supply have grown considerably and the surplus Money flowing into Bonds has lowered Rates. This has injected a large amount of Consumption loans into the system, causing global Economies to grow rapidly, and giving us a future Price Inflation scenario.
Debt to GDP and Rates agrees
The K-Wave also confirms part of this model
Kondratieff had already noticed that the Winter low in Rates usually occurred near the end of Economic contraction. As the Economy resumes growth, the demand coupled with the surplus in Money Supply causes Price Inflation. The drain of Money from Bonds for Economic growth causes Rates to rise, sometimes too much if Debt and the Money Supply does not keep up with the Economic growth. Over the last 200 years Rates hit their lowest in 1945, after the severest contraction in Economic activity in recent history. Not surprisingly, the largest surplus of Money Supply has caused the largest Price Inflation of the last 200 years. Since the low in 1932, Commodities have gone up 10 times, a behavior out of character with previous K-Wave cycles. The post War baby boom generated strong growth, with large increases in Rates and Prices in the late 1970′s, that led to the confidence and large growth in Money Supply now. This model predicts that when Rates start to rise signaling the Economy stopped contracting, we will face another round of Price Inflation similar to the 1950-1980 period, unless the Economic contraction turns severe and we have Price Deflation like the Depression in the 1930′s or Japan in the 1990′s.
The Kondratieff Wave agrees