The Relationship Between Interest Rates, Inflation, and Cryptocurrency

Many people are grappling with today’s market forces. I’d like to share some insights and opinions to help (over)simplify macroeconomics.

Monetary policies are decisions made by the Federal Reserve—primarily concerning inflation (𝑖) and interest rates (𝑅).
Fiscal policies are legislative actions that influence money spent (e.g., minimum wage) and money withdrawn from the market (e.g., tax codes, tariffs).
Let’s set a premise: money serves as both a commodity and a means to buy goods simultaneously.
𝑅 = the cost of borrowing money.

If you seek help from banks (BORROWERS), such as a small business owner or a homebuyer, interest rates determine your cost. They also influence the return you get if you deposit money into banks; think of a wealthy investor seeking profit(INVESTORS).

Lower 𝑅 means lower borrowing costs.

This helps BORROWERS access funds from banks and inject them into markets. But if rates stay low for too long, money becomes abundant. As a widely held commodity, it loses value—leading to inflation. Additionally, if everyone has money and demands goods and services that aren’t readily available, DEMAND>SUPPLY. This is known as ECONOMIC OVERHEATING.

Higher 𝑅 restricts borrowing.

This scarcity of money helps control inflation. If more money moves from markets into banks (because savings accounts offer high returns), companies may be forced to cut prices to incentivize spending of that “scarce money.”

Now, what is INFLATION?

Inflation is the general upward movement of prices, often driven by the WAGE-PRICE SPIRAL. Think of it as the government’s BUILT-IN raise—just like any other worker. Simply put, you need more money to buy the same commodity each year.

High economic activity → low unemployment → high spending power → unavailable goods → DEMAND>SUPPLY → BUILT-IN inflation, consistent with the Phillips Curve.
Inflation can result from limited supply (demand > supply), or from greed—such as price gouging.
It can also stem from excess money in the market that isn’t tied to economic activity, e.g., PRINTED MONEY or PROLONGED LOW INTEREST RATES.
Inflation can be managed by increasing interest rates → less borrowing → reduced spending and purchasing power → lower demand. (𝑅 follows 𝑖)
Alternatively, inflation can be curbed by moving money from markets into banks or by pulling money from consumers through taxation.
Practically speaking, people seek INFLATION CUSHIONS.