The first chart shows the growth of the Dow and of Treasury debt from the beginning of this century. As you can see, there was no particular correlation between the two right up until the early 1980s. In fact, up until the huge surge in debt issued to finance World War II, Treasury debt hardly registers on this chart at all.

The steady and inexorable rise in Treasury debt began with the 1970s. The most important event which made this possible was the removal of the discipline of Gold backing for the Dollar, which took place on August 15, 1971. This chart of Treasury debt was likened to a "hockey stick" in the mid 1990s. You can clearly see that 1970 marks the point where the blade ends and the stick begins.

This second chart is a "blow-up" of the first one, covering the last 20 years. This is where the correlation between the Dow and the level of Treasury debt gets really interesting ...

The explosion in the price of real goods and services ("inflation", by modern definition) peaked at the beginning of this series, in 1979 - 1981. Real inflation - the increase in the total stock of money - is still increasing. All modern money is based on debt. But even though gross Treasury debt is still increasing too, it annual rate of increase is slowing down - fast.

In fact, the acceleration of Treasury debt peaked eight years ago - in 1991. 1991 was the year of the last (comparatively mild) recession in the U.S. To combat this recession, the Fed lowered interest rates from 8% to 3% in 16 steps between July 1990 and September 1992. The Fed Runds rate then stayed at 3% for more than a year, until February 1994.

That huge fall in interest rates led to a sea change in the attitudes of Americans. Slowly but surely, they began to abandon the banks and traditional investments like real estate. More and more, having shaken off the scare of the 1987 crash, they began to put what used to be their "savings" into the markets.

For thirteen years, the increase on Treasury Debt supplying more money to the system dragged the Dow upward. In fact, from 1982 to late 1994, the correlations between $US 1 Billion of Treasury debt and one point on the Dow was uncannily close.

But by 1995, the rate of debt increase could no longer be sustained. The slope of the "debt curve" began to flatten out. This was hailed as a sign of inflationary pressures going out of the system.