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Turk:  “Eric, although there are still a few hours for Congress and the President to act before today's midnight deadline, it looks like the US government is going to shut down.  Both sides are lining up for a fight, and the rhetoric is flying, with everybody trying to pin the blame on everyone else.


There are two closely interrelated issues here:  First, Congress and the President need to agree on a budget that lays out how money will be spent in the new fiscal year that begins tomorrow....


Continue reading the James Turk interview below...




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“Instead of a formal budget, they could agree to another continuing resolution - which is how the government has kept operating for the last 5 years without an approved budget. 


But if they choose this option yet again, it will put the dollar ever closer to the edge of the cliff because there is a far more important matter at stake here, which leads directly to the second issue:  The debt limit needs to be increased to enable the government to get all the money the politicians intend to spend.


The US government only has enough money to operate for just a couple of weeks.  We all know about the ongoing budget deficits the government is incurring because incoming revenue is not enough to meet what it is spending.  And by mid-October the government will have run out of money. 


So even if it approves another continuing resolution to skirt around the impasse of not having an approved budget for a sixth year, the government needs an increase in its debt limit, or pare back spending so that it spends no more than what it takes in as revenue, which is an outcome I do not expect will ever happen.


What most people don't realize is that the politicians and Treasury bureaucrats have been skirting the spirit of the debt ceiling law since mid-May, which is when the current $16.7 trillion debt ceiling was actually reached.  By shifting some money around, not paying some of its obligations, borrowing money in ways that are not part of the legal debt ceiling, and running down the balances in its checking accounts, the government has managed to stay afloat for more than four months without increasing the amount of debt above the restricted ceiling.


The government is spending about $60 billion more each month than it receives in revenue.  That means since mid-May it has spent enough money to already put it more than $200 billion above the debt limit, which I think is an interesting point:  Even though the government has not increased the total amount of its debt since mid-May, interest rates have been rising. 


Think about the implications of this, Eric, rates have been rising during this period even though the Federal Reserve has been buying $45 billion of Treasuries each month, while the supply of Treasuries has remained unchanged.  When the government starts issuing debt again, we should be ready for a massive rise in yields once the debt limit increase is approved, which I expect will be increased despite all of the political posturing.


The key point here is that interest rates are rising because of the US government's ongoing budget deficits which are being made possible by the Fed's quantitative easing.  Like a mouse on a treadmill moving too fast, the government can't stop. 


Perhaps a real life comparison will be a better way to make this important point:  What is happening today is just like the speeding, out-of-control treadmill in which the Weimar German government was caught.  Back in 1920s there was no discipline on what the German government could spend.  Its spending was out of control, just like what is happening in the US today. 


Even though there is a debt ceiling, the US government has found a way to keep operating, which has allowed them to spend $200 billion or so, and the Federal Reserve continues to buy government paper just like the Reichsbank did for its government.  And we all know that the hyperinflation the Reichsbank unleashed from its “quantitative easing” program caused devastation throughout Germany.


So the implications for the dollar and the US economy are ominous if the debt ceiling continues to be increased without any attempt to rein in spending to reduce the perennial budget deficits.  As the political debate heats up, and until the debt limit is increased, I expect that a government shutdown will be positive for T-Bond yields, meaning yields will fall as the Fed soaks up what will be a fixed supply of paper.  But once the debt ceiling is increased, yields will soar, because of the tidal wave of new debt the government will unleash.


I expect the result to be chaotic conditions in the market for long-term rates and the dollar.  The beneficiaries will be the precious metals and non-financial stocks as people flee the dollar to get invested in real assets.  They will do this directly or indirectly by owning shares in companies that own real assets, which of course includes the mining companies.  Bonds and even short-term government instruments will drop precipitously.


Either way, Eric, the choices the US government has before it are not good, but we should not be surprised.  It has been living beyond its means for decades, and reality is just now starting to catch up.  The illusory conditions the government has created with artificially low interest rates could not last forever. 


The outcome will be a collapse of dollar purchasing power and soaring precious metal prices.  This will be third time this has happened in American history -- the first two currency collapses being the Continental and the Greenback.  But this collapse will be much more catastrophic because of the unprecedented size and scope of the coming collapse and resulting chaos that will follow.”


© 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 Jim Grant, Gerald Celente, William Kaye, Dr. Paul Craig Roberts, Chris Powell, Michael Pento, Eric Sprott, Andrew Maguire, Grant Williams, Bill Fleckenstein, Art Cashin and Egon von Greyerz are available now. Also, other recent KWN interviews include Marc Faber and Felix Zulauf to listen CLICKING HERE.


Eric King

KingWorldNews.com

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