Thursday, February 25, 2010

Interest Rates in a Deflationary Environment

People Normally Associate Rising rates with Inflation (Since the Value of Dollars is going down, people expect to be compensated with a higher rate of return.)However, This chart displays how it is indeed possible (and I think likely in this environment) to have rising interest rates in a Deflationary environment. When the Demand for money and credit goes down, one would expect the price of money (Interest Rates)to go down as well. However in this case I think the supply of Credit (people willing to lend out) is contracting faster than the demand for money and credit, so the price (interest rate) goes up.


  1. Thanks. This is exactly the reasoning that Prechter is pushing and your chart is a good way of illustrating it.

  2. Exactly. It looks as if the Bull market in bonds (Bear Market in Interest Rates) is coming to an end. There is CLEAR negative divergence on the monthly 30-year bond price chart as well as positive divergence on monthly interest rate charts. 30 Years in an uptrend for bonds is long enough. It certainly looks like the entire credit structure ( public not just private debt) is on the verge of imploding. I think people will be surprised by the effect (deflation), as currently public sentiment is clearly biased toward inflation as there are commercials on TV to buy Gold or sell your Gold to financial institutions. They say "The price of Gold has risen 200% since 2001." Wouldn't that be a reason NOT to buy it? It is really striking when you think about it how the supply/demand curves for financial markets (due to society's "herding" impulse)are so different than the market for consumer goods for example. Anyway I'll certainly post charts of Bonds/Interest Rates when the Uptrend/Downtrend lines break, respectively. It should be an interesting event. Thanks for the comment!