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Turk: “The future of whether or not the Federal Reserve will begin tapering its bond purchases will be made clear on Wednesday, Eric, when the Fed releases the minutes for its last FOMC meeting.  We actually got a sneak preview of what they will say from a little noticed but very revealing speech last week by the President of the Federal Reserve Bank of Boston....

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“Eric Rosengren said that the decision to taper in September might have been made, “had U.S. fiscal matters not been so problematic.” 

This comment reveals some very significant insight into the Fed, and it also confirms my view of the Fed in two respects:  First, despite its protestations to the contrary, the Fed is not independent of the government.  It is an arm of the government and will do the government's bidding.  This leads to the second point:  Even though the Fed claims its mission is to keep unemployment low and maintain stable prices, that is not its real purpose.

If it were judged on that criteria, the Fed would long ago have been legislated out of existence because its performance in these two areas is so poor.  The dollar only has a fraction of the purchasing power it did when the Fed was started 100 years ago, and high levels of unemployment and underemployment have been recurring problems ever since the Fed was given control of interest rates, and therefore the economy.

The real reason the Fed exists was made clear by Mr. Rosengren, the Boston Fed's president -- The Fed exists to make sure the US government gets all the money it wants to spend.  The Fed does this by making sure that all of the US government debt being issued is bought by someone, even if the Fed has to buy the paper itself.  That is what quantitative easing is all about.

The huge federal government deficits have resulted in its record borrowing.  There is more debt being issued by it than investors have the financial capacity or the willingness to buy.  So the Fed has stepped in by buying over 50% of the T-bonds being issued and is now the largest holder of US government debt (over 20% of the total).  If the Fed wasn't buying all of this paper, who would?

It is possible that some central banks under the US government's influence would buy the debt, but it is important to note that investors are exiting bond funds in droves.  The biggest bond mutual fund has had customer redemptions for five months in a row, which included some record outflows.

So let's take Chairman Ben Bernanke at his word that the decision to taper is data dependent.  But the question is, Eric, which data?  The Fed talks about unemployment and inflation, but the numbers it uses are inaccurate because government statisticians release data that does not reflect the true underlying conditions.  If decisions are made on data, the data should be sound.

So which sound data is the Fed looking at?  The answer is federal deficits, the accumulation of the resulting debt, and most importantly, who is buying that debt.  The Fed realizes that if it were not buying the government's debt, it would take Paul Volcker-like high interest rates to sufficiently entice private investors to accept the risks that come with buying US government debt, which is likely to endure another ratings downgrade.

I believe we are now approaching the end game, Eric.  The can has been kicked to the end of the road.  The reality is that the profligate US government has a mountain of debt and a sky-high stack of promises it can never fulfill, but remains stuck in its ways.  The US thinks that its reckless financial policies can continue forever, but inevitably a system that is unsustainable always comes crashing down.

That is why the debt ceiling debate is so important.  It is the last discipline imposed on a spendthrift government.  When it is increased, and I expect it eventually will be, the floodgates will be opened to release a tidal wave of Fed money printing.  I believe the end game will be far more radical than anyone anticipates.  When the mountain of debt and derivatives really begins to implode, it will shake the financial world to its core because we will see the disastrous effects of 4 decades of monetary and fiscal mismanagement.

I believe this also explains why the lows in gold and silver were made over three months ago, Eric.  Their prices have been trending upwards ever since, and, importantly, today they are breaking above key overhead resistance levels.  This unprecedented and incredibly dangerous monetary experiment is heading toward a catastrophic outcome, and physical gold and silver will prove to be the only true safe-havens during the coming chaos.”

IMPORTANT - KWN has a special interview which is about to be released that discusses the coming end game.

© 2013 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 audio interviews with Bill Fleckenstein, David Stockman, Robin Griffiths, Jim Grant, Gerald Celente, William Kaye, Dr. Paul Craig Roberts, Chris Powell, Michael Pento, Eric Sprott, Andrew Maguire and Grant Williams are available now. Also, other recent KWN interviews include Marc Faber and Felix Zulauf to listen CLICKING HERE.

Eric King

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