In a strictly supply/demand driven world credit contraction would have a corresponding effect on interest rates, they should go up. This isn’t a supply and demand driven world though. Quite often the reasons for liquidity are more political than economic and therefor not amenable to that type of analysis, at least by itself.
The Chinese aren’t loaning us money, nor were the Japanese before them, becuase they like us. They are doing it to keep their exports stable. When they judge this no longer profitable they will stop, but that’s not an economic calculus, its political.
