What Happens to Gold with Lower Interest Rates?

We aren’t in the business of defending Federal Reserve chairmen.  We don’t defend anything about the Fed.  It has been a world class calamity for the value of the dollar.  It is the main agency for bailing out banks with the peoples’ money.  And the idea that a handful of bureaucrats and academics should be setting interest rates in a $29 trillion dollar economy, instead of letting supply and demand, and millions of borrowers and savers work out satisfactory interest rates themselves, is one of most destructive elements of central bank activities.

There.  We feel better saying that.  

Now, what happens next?  For now, the President has said firing Powell outright is highly unlikely.  Nevertheless, Trump has declared jihad on Chairman Powell, dubbed him with the nickname “Too Late,” and is demanding Powell lower interest rates.  Now.  And not just a little lower.  A lot lower.  

Last week Trump posted this:  

Our Fed Rate is AT LEAST 3 Points too high. “Too Late” is costing the U.S. 360 Billion Dollars a Point, PER YEAR, in refinancing costs. No Inflation, COMPANIES POURING INTO AMERICA. “The hottest Country in the World!” LOWER THE RATE!!!

Okay.   As we write, the yield on the US 10-year Treasury note is 4.48 percent.  But recent Treasury auctions are described as “weak.” The Treasuury has a growing problem.  It is experiencing difficulty attracting buyers.  Demand for 20- and 30-year bonds has been soft.

Bond buyers are lenders.  When they buy US government bonds, they are loaning money to the US government.  But when lenders are backing away, sensing risk to their funds, how are they induced to lend any way?  

By offering them higher interest rates.  

That is the opposite of what the President wants.  Trump wants the Fed to lower interest rates.  All presidents want easy money, in the hopes of creating a boom – although an artificial boom is always accompanied by a bust.

Can the Fed lower rates?  Forcing interest rates three percent lower (which is what the President means) would see the 10-year Treasury note paying 1.48 percent.  But if rates on US government bonds are driven so low, who will want to buy them?

Bill Bonner answers that question with a single word: “Nobody.”

In fact the primary remaining buyer would be the Federal Reserve.  It would have to create “money” out of thin air to finance Washington’s debt.  Call it what you will, liquidity operations, money printing, quantitative easing, or debt monetization, it would have to massively inflate the supply of money and credit to keep Washington’s borrowing and spending going.  As Bonner says,

The Fed would have to ‘print’ the money…US bonds and the dollar would crash…sending the US into the long-awaited credit crisis, chaos and recession.

That of course would be very bad for the economy.

But very, very good for people who own gold!