Interest rates, inflation, and gold

Monetary authorities and domestic users do not understand the true relationship between their fiat currency, the threats to its purchasing power, and the relationship with gold.

It’s now increasingly assumed that the US economy is not performing as well as the statistics suggest, and that the Fed must cut interest rates and keep on cutting. The assumption is based on a mixture of Keynesian hope and market experience of the last three or four decades, which cover the work-experience of today’s investment managers. Last week I quoted from an article by Ambrose Evans-Pritchard in The Daily Telegraph of 5 June, who wrote that “Citigroup says that the Fed will have to cut interest rates in July and at every meeting until mid-2025”. Therefore, a research report from one of the largest banks in the US is evidence of this view.

It must be admitted that in the short term, such a strong consensus over interest rates can become self-fulfilling. Perhaps the ECB led the way last week with the first cut in its deposit rate, which suggests that the back chat between leading central banks confirms that the ECB will not be alone and that we can expect the Fed to follow as soon as it decently can, though officially it is still fence-sitting. And perhaps the Bank of England will cut after the UK’s general election.

Unfortunately, the problem for central banks is that inflation is proving to be sticky, and the prospect of it returning to their 2% target and remaining there is remote. To understand why this is the case requires an understanding of what inflation represents: it is a decline in the currency’s purchasing power. It’s just that evidence of the decline is reflected in a higher level for prices generally.