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Today, later, after this unexpected statement, of course, I don't understand why anyone is surprised at all . I mean , I wasn't surprised. I mean, I was waiting for this. I know the impasse the government is in. They simply cannot allow the rates to rise. Therefore, they do everything possible to counteract the free market.
But the free market demands higher interest rates for a reason . And the reason is that we have too much debt. And the way to stop excessive debt is to make borrowing more expensive. The government wants to prevent this so it can continue to borrow even more. But this only worsens the future crisis, because the " bubble" becomes much larger than if the market had burst it earlier.
In fact, it would have burst long ago if not for government intervention in the market. But, be that as it may, when the FOMC minutes were announced at 2:00 PM , they turned out to be more hawkish than the markets expected. And if it weren't for this morning's announcement , the stock market could have collapsed today.
The bond market could go into decline. Yields could increase because no one wanted to lower rates. Everyone was just talking about raising rates. Of course, there were those who disagreed and wanted to raise rates immediately, but the FOMC's view was that inflation was a problem, it was too high and would likely continue to rise.
Now, you know, they were looking for an excuse or someone to blame for the inflation. Some of them blamed artificial intelligence. The stock market does not cause inflation. Artificial intelligence does not cause inflation. The Federal Reserve causes inflation. The government is helping the Fed create inflation by running such huge budget deficits.
So the fact that our national debt is $40 trillion and it's growing rapidly -- because when I did the podcast a few days ago, we still had about $80 or $100 billion left, but we've moved forward quickly. And this is what causes inflation. And again, it's not the war that causes inflation, but how we finance it.
These are the deficits we have. We didn't raise taxes to pay for the war. We did not cut other spending to free up resources for war. We were just wasting it. So, larger deficits mean higher inflation. But the Fed never talks about it . They never mention these huge deficits as the cause of inflation.
They never talk about the entire money supply and the money they print. Although they talk about the balance sheet and the need to reduce it. Well, how are they going to do that when the Fed is conducting “Operation Twist”? What? Are they going to sell back the bonds that the US government is buying?
They are not going to undo what the Treasury is doing. Of course, they will coordinate actions. They will work together. So , this is impossible. But if it weren't for this announcement , it could have been a big problem for the markets. Actually , I don't know, maybe the Treasury knew that the FOMC minutes would be "hawkish" and they had to level it out before it had a chance to affect the market.
So the market essentially shrugged it off . The probability of a rate hike has decreased, despite the fact that the FOMC minutes turned out to be more hawkish than expected due to the actions of the US Treasury. Now the market confirms my interpretation. Because look what happened to the price of gold.
So, gold fell about $80 yesterday. It closed near the daily lows. This was probably the worst day for gold in at least a month, if not more. And, you know, silver also fell. Gold is up about $185 today. Closed above 4500. In fact, gold fell about $20 last night. So, there was an intraday increase of $200.
Huge. Technically, it was a reversal day because today we broke through yesterday's low for gold and then closed well above yesterday's high. So, a technical reversal. We are now about 13% above the low for gold. Gold bottomed out just below 4,000. If you remember, I was adamant on this podcast, "Look, 4,000 is the minimum.
You should, you know, you should buy this." And, you know, we're already above 4,500. Silver also had a great day. It closed above $66 per ounce. Let me see where it is now. I'm recording this tonight. It is now about 9:30 pm. And, well, silver actually fell about 18 cents . Now 66.71. So, yes, well above 66.
In fact, it looks like it might have gone above 67 earlier in the evening. Gold is retreating. It fell about $20 but is still trading above 4,500 . So, a very significant day for gold and silver. Mining company stocks were " on fire" today. Many of these stocks are up 7, 8, 9, 10, 11, 12%. I think GDX and GDXJ are up 8%.
You know, both of these indices have risen almost 40% in the last month, and they have risen for exactly the reason I was talking about. Gold has fallen in price. Gold mining stocks fell because people were fooled by the Kevin Warsh show. All this talk about how we will fight inflation hard. Inflation will return to 2%.
Everyone was saying, "Oh, there's a new sheriff in town." He is the reincarnation of Paul Walker. And I said: " No way." Markets are wrong. He won't do that . These are all just words. And I kept repeating: " Look at what the Fed is doing." Pay no attention to what Warsh says. Look at the money supply.
Look at the balance sheet. Note that they do not raise rates. All these loud statements did not match the fact that they sat idly by and did nothing. And now the Treasury is making it even more difficult for the Fed to fight inflation. In fact, they create much greater pressure, fueling inflation. As the Treasury continues to shorten the maturity of the national debt, each time the Fed raises rates, it does much more damage to the budget.
The budget deficit is growing because servicing this debt now costs more. So, by trying to fight inflation, the Fed is actually laying the groundwork for even more inflation, because who will finance these deficits? Ultimately, they will have to be financed by the Fed. That's why I kept talking about the drop in the bond market.
People were worried that rising bond yields would negatively impact gold and silver. And I argued that on the contrary, this is a positive signal, because rising yields will force quantitative easing. Rising bond yields will weaken the economy. This will lead to an increase in the budget deficit. In fact, the reason for the increase in bond yields was inflation.
And it wasn't at all the case that high bond yields would become competition for gold. Like, I'd rather sell gold to get 5% per annum on 10- year Treasury bonds. No, it was just another reason to sell bonds because their prices were falling. When Treasury bond yields rise, it means their price falls.
This means that if you own bonds, you are losing money. So, what would you like to do? You will want to get rid of bonds and buy gold. So, a weak bond market is a positive signal for gold. This is not a negative signal, precisely for the reasons we saw today. However, the long-term problems will begin when all this short-term debt comes due and has to be refinanced, or because the Fed realizes this vulnerability and does not raise interest rates.
In fact, what people are calling quantitative easing again is not quantitative easing, because the Fed is not buying. So the money supply doesn't increase as a result , but it will, because when the U.S. government sells these short-term Treasuries, who will buy them? I think the Fed will eventually buy them, effectively launching a quantitative easing program.
And really, because the Treasury won't buy enough long-term bonds to stop growth. They think they will slow it down a bit , but they won't stop it. Eventually the Fed will get into this game. So, quantitative easing is coming. In fact, the Fed is already implementing quantitative easing. It's just not an official program, but they'll have to build it up.
And it is obvious that they will not be able to raise the rates. This will lead to a conflict between monetary and fiscal policy . Fiscal policy is stimulatory. They are trying to lower long-term rates . So, basically the government, having large deficits and buying up treasury bonds, is pursuing a very loose fiscal policy, which complicates the work of the Fed in implementing a tight monetary policy.
Because the Fed is worried about inflation being too high, the Treasury Department is now making the Fed's job more difficult, further increasing inflationary pressures. So as soon as the news breaks and people are discussing whether this is quantitative easing or, I would say, it's more like "Operation Twist." You remember this, this happened after they did the first quantitative easing.
It seems to have been between QE2 and QE3 when they did " Operation Twist". And if you remember, I called it " Operation Screw" back then, because they were "screwing" the country: the Fed was selling short-term debt to buy long-term debt to lower long-term interest rates because the markets were more sensitive to them, like the mortgage market.
So it's like "Operation Twist," only it's being conducted by the US Treasury, not the Fed. But again , this is just a glimpse of what will happen. The government is already panicking. They will sacrifice inflation to try to slow interest rates. Again, I said I agree with Kevin Warsh: inflation is a choice.
He acted as if the Fed would not choose inflation. I said from the beginning, of course , she will choose inflation, because she cannot choose the opposite. And the fact that the Treasury is already moving in this direction is a pretty clear indication that the Fed will move in the same direction.
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