James Turk continues:

“The Fed has set the stage for another round of Quantitative Easing, which of course will be inflationary, and therefore bullish for gold and silver.  But what the Fed always tries to do is control expectations.  They place greater emphasis on the notion that inflation is not a result of how much currency is actually in circulation or how rapidly the quantity of currency grows, but rather, whether people think inflation will worsen.

Like many things that come from central banks, it is a silly notion.  It is another one of those things that seem okay in theory and the halls of academia, but never works out in the real world.  The reason, as Milton Friedman and others have pointed out, is that a currency's purchasing power will be eroded if the quantity of money increases....

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“And QE - or whatever the Fed chooses to call it - does exactly that.

There is a point here that most people do not yet realize.  There is a direct causal effect between the US government's fiscal situation and the Fed's actions.  The Fed’s stated goals are achieving stable prices and low unemployment.  

Of course central planning doesn't work, but for whatever reason society allows the Fed to make believe that they have a superior central planning knowledge not possessed by mere mortals, even though the Fed's track record pretty much throughout its history has been horrible.

I mean, just think back to the peak of the housing bubble and read some of the comments by the last two Fed chairmen.  They didn't see it coming, nor did they say that the collapse would be as bad as it actually turned out to be.  Yet we are supposed to believe that the Fed can control inflation and keep the economy humming with high employment.

Anyway, here's the point I want to make.  There is no discipline on US government spending.  If there were, there would not be a string of trillion dollar deficits nor forecasts for trillion dollar deficits as far as the eye can see.  These deficits mean the US government has to borrow money to fund its operation. 

It is actually borrowing about 40% of the dollars that it is spending.  These dollars can come from two places. It can come from savings, meaning people use accumulated wealth to buy the US government's debt, or the dollars can come from the printing press, and that leads to hyperinflation.

If we look back at monetary history, eventually people run out of money to buy government debt.  They have used up all their savings.  Also, some people simply run out of patience waiting for the government to fix its finances and lower the risk of default.  So they just choose not to buy the government's debt.

When that moment is reached, or in other words, when the government can no longer sell its debt, it has two very stark choices:  It can stop spending, because it no longer has the currency it needs, or it can force the central bank to give it the currency it wants.

You will recall I have dubbed this ‘Y-in-the-road’ a Havenstein moment after the hapless, but well-intentioned Reichsbank president who unleashed the devastating German hyperinflation by accommodating the German government.  He turned German government debt into currency. 

That is what QE does - though QE creates deposit currency and not cash currency, the underlying misguided policy is the same.  Government debt is turned into currency, and that leads to hyperinflation.

You will recall that we did a blog on this on July 8, 2010, which included an exclusive report I prepared for KWN readers.  Sadly, the US government's deficits have not disappeared.  So this week the Fed faces a Havenstein moment.  Will they say that no QE is in the cards and that they will not fund government spending?  Or will they bend over like Herr Havenstein and drive the car toward the currency cliff?

Sadly, I expect the latter because the Fed's first and foremost objective, though never stated, is to make sure the US government always - always - gets the currency it wants to spend.  The bottom line here is that gold and silver, in this environment, are headed a lot higher.

So my recommendation to KWN readers remains unchanged, Eric.  Keep accumulating gold and silver on a cost averaging basis because the currency cliff is fast approaching.”

Turk also added: “We can expect more than the usual volatility this week, Eric.  It’s the result of the crosswinds leading up to the Fed meeting.  I would add there is lot of money out there that is waiting for a pullback, but given what is happening around the world, I don’t think there is time to wait for a pullback.

Eric, I know there are some traders who are still not in the gold and silver markets.  For those that are looking for an entry point, use any downside volatility before or after the Fed meeting to get in.  Regardless of what the Fed announces this Thursday, I expect new highs in gold before the end of this year.”

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with Michael Pento, Gerald Celente, James Dines, Marc Faber, James Turk and Art Cashin are available now.  Also, be sure to listen to last week’s line-up of other KWN interviews which included Egon von Greyerz, Sean Boyd, John Hathaway, Eric Sprott and Jean-Marie Eveillard by CLICKING HERE.

Eric King

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© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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