Real Interest Rate

The real interest rate is the nominal interest rate minus the rate of inflation, measuring what a lender actually earns in purchasing power. A bond yielding 5 percent during 3 percent inflation delivers a real rate of roughly 2 percent, while the same bond during 7 percent inflation loses ground despite its positive coupon.

Why it matters

Real rates, not nominal ones, drive saving and investment decisions. Negative real rates quietly transfer wealth from savers to borrowers, the largest of which are governments, a dynamic historians call financial repression and associate with the decades after the Second World War. Markets price expected real rates continuously through inflation-protected Treasury yields, which swung from below minus 1 percent in 2021 to above 2 percent in 2023, one of the sharpest tightenings on record.

In the gold vs bitcoin debate

The real rate is the price of holding a non-yielding asset. When real yields are deeply negative, gold's lack of income costs nothing and the metal has historically performed strongly, as in the 1970s and 2020 to 2021. When real yields rise, both gold and bitcoin face a headwind, and both sold off during the 2022 tightening. Gold's decades-long inverse relationship with real yields loosened notably after 2022, when central bank buying supported prices despite positive real rates, a shift analysts are still debating. Bitcoin's shorter history shows a similar sensitivity with far larger amplitude.