"For every action, there is an equal and opposite reaction." This is a principle in physics but it applies to economics as well.
In this episode of the Money Metals' Midweek Memo podcast, host Mike Maharrey delves into the impacts of Federal Reserve interest rate policy on the economy using the current state of the housing market as an example. He demonstrates the profound problem the central bank currently faces and how it's impacting your money.
This week, Mike also delves into the recent movements and dynamics in the gold and silver markets.
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Mike kicks off the show by explaining that while the principle "For every action, there is an equal and opposite reaction," is a physics principle, it also applies to the science of economics.
"This is a description of Newton's Third Law of Motion. In effect, when one object exerts a force on another object, the second object exerts an equal force back on the first object, but in the opposite direction; essentially, forces always come in pairs. This also holds true to some degree in economics. For instance, if you raise the price of something, demand for it will fall, all things being equal. Now, I know economics isn’t exactly like physics. At its core, economics is the study of human behavior and that can be tricky. There is a lot of subjectivity in human action. However, there is enough consistency that we can pinpoint certain economic laws, just like we can pinpoint specific laws of physics."
Mike reminds listeners that the Federal Reserve is in a Catch-22.
"In a nutshell, the Fed simultaneously needs to raise rates, or at least hold them higher for longer, to really put price inflation in the grave. But it also needs to cut rates because there is so much debt and malinvestment in the economy due to well over a decade of loose monetary policy – artificially low interest rates and money printing. That had consequences – that equal and opposite force – that is still playing out today."
Before delving into that topic, Mike analyzes the recent selloff in gold and highlights some of the dynamics in the market.
One of the factors driving the selloff was trade war worries and that the Fed would hold interest rates higher. Conventional wisdom dictates this is bearish for gold.
"But unless the Fed actually raises interest rates, and I think that is highly unlikely due to reasons I’ll get into here in a minute, rising inflation will actually be bullish for gold as real rates drop. Not to mention the fact that gold is an inflation hedge. You want to have gold and silver in an inflationary environment to shield you from the erosion of the dollar. And then there is the other side of the tariff trade – it is going to cause economic chaos and that will likely drive safe-haven demand. So, I don’t think the trade war issue is nearly as bearish for precious metals as some pundits on CNBC might have you believe."
Mike also highlights an interesting development in the gold market that indicates Western investors may be hopping on the bandwagon.
"Last week, 48.8 tonnes of gold flowed into North American-based gold-backed funds. The last time we saw weekly flows at that level was April 2020 as governments were locking down economies during the COVID-19 pandemic. It will be interesting to see if this was just a blip or the beginning of a trend."
Mike then pivots back to the issue facing the Fed.
"The Fed is walking a tightrope between keeping rates up to fight price inflation and cutting rates to give the economy the easy money it yearns for. It’s pretty easy to see the price inflation effect. Just go to the grocery, right? Or if you are a data person, look at the CPI. But you might question my assertion that the economy has a problem. After all, by a lot of metrics, things look fine. But I like to remind people that things also looked fine in 2007 even as the consequences of Fed policy after the dot-com bubble popped was rotting out the foundation of the housing market. And if you look closely enough, you’ll find some things that, well, aren’t so fine."
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Mike points out that we can see the impact of higher rates on the economy in the crashing housing market. Home sales are particularly sensitive to interest rates because pretty much everybody has to borrow to buy a house, and the higher rate environment has driven mortgage rates much higher.
"This rise in mortgage costs has had a significant chilling effect on the housing market in the U.S."
Mike backs up this assertion with the data.
"The fact of the matter is buyers are reluctant to wade into the market with prices still high and mortgage rates above 7 percent. As a result, we're seeing a slow collapse of the housing market."
It's not just about housing. Mike argues that the real estate market is a microcosm of the broader economy.
"Higher rates increase the borrowing costs for autos and other big-ticket items. And then there are the credit cards. Over the last several years, many people have turned to plastic to make ends meet. It's fair to say the U.S. economy runs on Visa and Mastercard."
Meanwhile, businesses are also feeling the pinch of higher rates reflected in a sharp rise in delinquent corporate loans.
"So, high interest rates are a problem. And so are low interest rates. What is a Fed central banker to do? It underscores the Fed's Catch-22. It is walking a tightrope between runaway price inflation and a collapsing economy. The question is which way will it fall?"
Mike argues that at the end of the day, the Fed will choose propping up the economy with loose monetary policy -- inflation be damned.
"If the economy gets shaky enough, the Fed will cut rates. It will run quantitative easing – and by that I mean print money – inflation be damned. It will pick saving the markets over keeping prices down. And this is why I am long-term bullish on gold and silver. I know the central bank will inflate. It will devalue the money. I want real money. I want gold and silver."
That leads to Mike's call to action. Get gold and silver today. After all, price dips are a buying opportunity.
"Now is the time to talk to a Money Metals' precious metals specialist. Call 800-800-1865 today!"
Articles Mentioned in the Show
Why Inflation and Real Interest Rates Are Bullish for Gold
Paper Gold Vs. Real Gold: It's Important to Know the Difference
About the Author
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
