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Inflation Doesn't Follow Interest Rates It Follows Government Programs

May 31, 2021 11:22 AM ETiShares Silver Trust ETF (SLV), GLD
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  • Inflation and interest rates do not correlate.
  • Look at government spending for signs of inflation.
  • Gold and Silver will be 10 baggers.

The market and its participants have a misconceived notion that interest rates follow inflation. But truth is, interest rates are only a tool of the biggest wasteful spender of them all which is government. So to know whether inflation is about to rear its ugly head then watch what government does, not what the Fed does. The Fed is just a communist tool of the Federal government. Let me show you.

In 1964 the Fed began raising interest rates but at the same time we had the LBJ medicaid system enacted. So what happen that year? Inflation was 1% from a prior 1.6% , Interest rates were 3.75% from a prior 3.5% and kept going higher till 1966 to 5% but guess what happened to inflation? It went to 3.5% by 1966. All this while interest rates were going up. 

Then in 1966 we started with the Vietnam War. Inflation kept rising till 1969 to 6.2% meanwhile interest rates went all the way to 9%! Oh and did I mention the Moon landing of 1968 which was nothing more than increased government spending! But wait, mainstream economists tell us that interest rates cause inflation. No sorry that's not true. Let me keep going. 

Then in 1971 Interest Rates bottomed at 5% and guess what also bottomed? Ya you guessed it. Inflation at 3.3.%. Inflation rose to 8.7% in the next 2 years and so did interest rates to 9%. I guess interest rates don't affect inflation as much as you once believed. But guess what did? the Wage-price controls of 1971 and the end of the gold standard of 1973.

Then in 1976 interest rates bottomed at 4.75% but so did inflation at 4.9%. Both inflation and interest rates peaked four years later at 12.5% and 18% respectively. Wait I thought interest rates were a forward indicator? No but you know what was? The stop-gap monetary policy that the government implemented that year that kept prices soaring. Oh I guess its the government that needs to be reigned in and not the Fed as once believed. 

In 1981 the Reagan Tax Cut was implemented which kept inflation steady post recession of 1981 at 3.8% all the meanwhile interest rates stayed elevated at a near 9%. Military spending of 1983 also kept inflation up for the 2 years post the start of that spending. Even while interest rates went down since 1981 inflation was barely affected. It was the government spending that kept inflation stable. Interest rates were cut in half and inflation was only able to stabilize and not move up. I guess interest rates don't work as much as the Federal Government spending does.

In 1986 we had another Tax Cut while interest rates bottomed at 6% that year and Inflation at 1% The following couple of years interest rates went to 9.75% and inflation to 4.4%. I thought interest rates determined inflation? Nope its government spending. 

To prove my point further in 1991 Fed lowered rates from 7% to 4% then to 3% by 1993 meanwhile inflation went from 3.1 to 2.9% but no new massive government programs were enacted. Therefore inflation went down. 

In 2003 Inflation bottomed at 1.9% and interest rates did also at 1% meanwhile government enacted the JGTRRA. Interest rates went from 1% to 5.25 in the following 4 years while inflation went as high as 3.4%. Why? I thought interest rates affected inflation? Nope it was government schemes and programs. 

Years after the 2008 crisis, interest rates stayed at .25% meanwhile inflation was never able to gain any real traction except for 1 or 2 years at a time then deflating back to a mid 1.5% level. Inflation got up to 3% by 2011 but that was only because of the ARRA act of 2009 which once again proves my point. After that we basically had no new big government programs till now in 2020. That is why we kept hearing the Fed say that we need government fiscal spending cooperation to move the needle on inflation. They understood that interest rates by themselves mean nothing. All that matters is what kind of spending the government plans on doing.

Well what changed now in 2020 and 2021? Well now we have the motherload of all the year combined. Let me explain. Covid19 is the equivalent of a Vietnam War of 1966, Medicaid reform of 1964, Tax Cuts of 1981 and 88, and the JGTRRA of 2003 combined. All this with the fact that the Federal Reserve intends to not raise interest rates till 2024 and you have a case for some inflation not seen since the 1970's. This time interest rates will truly prove how much of a lagging ineffective indicator they really are.

What is going to be the result of all this? I believe Gold and Silver will be 10 baggers going forward as people realize all this when its too late. They don't study history like I have therefore you have people lazily calling 2020 the roaring 20's and/or 1988. They will look lazy and foolish when this is all over. 

There is a timing secret in all of this that I won't share. But you already got the crux of the message. Silver and Gold will shine from here on forward. 

Analyst's Disclosure: I am/we are long SLV.

just info not advice

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