Everyone in the financial media is talking about an imminent cut in interest rates as if they are guaranteed to happen. But we are not so sure.
Our working thesis is that if there are rate cuts, they will not be significant. We hold this view because federal government budgets are inflationary. Monetary inflation is the expansion of money and credit. Monetary inflation leads to higher prices when the rate of increase in monetary assets exceeds real economic activity. It does not happen immediately, which is why people get confused about relationships. The government deficit is particularly inflationary because the Federal Reserve buys US Treasury securities with Federal Reserve Notes, which are obligations of the Federal Reserve system. Other private sector actors use US Treasury securities as collateral so they can hold on to the income-producing asset and enjoy its purchasing power simultaneously.
We discuss these and other issue in the following video.
