Historical Debt, Money Supply & Interest Rates for the U.S.

This image from Ray Dalio shows the relationship between total debt as a % of GDP, money supply and interest rates in the U.S. going back to 1900.

Notice the inverse relationship between money supply growth and interest rates, and notice the changes in the cycle as the total debt as a % of GDP peaked.

Interest rates are the price of money. The price of a good or service is high when the supply of that good or service is low, and the price of a good or service is low when the supply is high.

This is no different for money. When there is a large supply of money, the price of money (interest rates) will be lower and vice versa.

Notice that each time the cycle changed, interest rates go to zero. This is because cycle changes are usually associated with debt monetization, which is when the central bank (the Fed in this case) prints money and buys bonds. This buying of bonds lowers the interest rate.

The three cycle changes in this chart come after the Great Depression (1933), the Great Financial Crisis (2008) and the Covid pandemic (2020).

All of these events led to a material increase in U.S. total debt, debt monetization and 0% interest rates.