Today one of the greats in the business spoke with King World News about what is going to create a hyperinflationary spiral and a massive panic out of the U.S. dollar. He also discussed how this will impact key markets.
James Turk: "Tomorrow Fed Chair Janet Yellen will be appearing before Congress, Eric, to give her semiannual Humphrey-Hawkins testimony on the economy and monetary policy. There are some implications for gold and silver prices….
Continue reading the James Turk interview below…
"For years the Federal Reserve has been warning that interest rates will rise eventually, but the moment to raise rates never seems to arrive.
Fed Continues To Deceive
The obvious strategy the Fed has employed is to delay raising rates as long as possible, but to keep the markets on a knife-edge by saying that rates will rise eventually. They always tie it to something, like the level of unemployment or when the economy improves or inflationary pressures become greater or whatever is the latest benchmark.
Former Fed Chairman Ben Bernanke repeatedly said that the Fed would raise interest rates when unemployment fell to 6.5%. We are below that level — at least by the number reported to the public. But the Fed has done nothing about raising rates except to continue jawboning that it will happen.
Will They Or Won't They
So will they or won’t they raise interest rates? The Fed’s credibility is on the line.
As a consequence, I think it is reasonable to expect some tough talk from Ms Yellen. But it will be only talk because the Fed never discusses the real reason interest rates are low.
First, reducing rates is the only tool the Fed has. Forcing interest rates lower and money printing are the two sides of the same coin, and both destroy capital. So it is understandable that economic activity is tepid at best. Even if inflation is running at 1.5% according to government numbers, that’s 1% or more than people are earning on bank deposits.
Capital formation — not capital destruction — is the key to good economic activity. So even though by all measures the Fed’s QE program is a failure, it is their only answer, and their financial repression is purposeful. By eroding the purchasing power of the currency, they lessen the burden of debt, which leads to the second reason.
Interest rates are low because the US government is over-leveraged and cannot afford to pay a fair interest rate.
The $18.1 Trillion Prloblem
The national debt is $18.1 trillion, which of course excludes all the contingent liabilities the federal government has accepted. But even this number is a towering mountain of debt relative to the federal government’s revenue.
For example, let’s assume 5% is a reasonable interest rate that one could earn on a T-bill. That’s 5% more than holders of T-bills are now earning, and to the point, 5% more on $18.1 trillion is $900 billion per year of additional interest expense that the federal government is now avoiding. It is also 30% of the federal government’s revenue.
Given that it will not cut back its spending plans on drones and food stamps by $900 billion to pay for this added interest expense, the federal government would need to borrow $900 billion more than planned, making the huge annual deficits even bigger. The dollar could then quickly end up in a hyper-inflationary spiral as holders of dollars flee from the currency into things.
All of this brings me to the main point. Rising interest rates are not bearish for gold and silver prices, though that is the conventional wisdom. All one has to do is look at what happened in the 1970s to disprove that notion.
Interest rates back then kept rising along with the gold price until the tipping point was reached, which was when real interest rates — rates adjusted for inflation — were at 6%, which was well above historical norms. In other words, regardless of the high inflation prevailing back then, dollar holders were still increasing their purchasing power by 6% per annum.
Interest Rate Anguish
It was this elixir that enabled then-Fed Chair Paul Volcker to bring double-digit inflation under control.
But this is not an alternative today because the federal government’s debt load is massive compared to what it was back then. The federal government can’t even afford a 5% interest rate, let alone the 16% interest rate Volcker needed to turn things around.
So expect more Fed jawboning when Yellen goes to Capitol Hill, but ignore it. Rising interest rates are not bearish for gold and silver. But month-end futures option expiry usually IS bearish, as the central planners rig prices through their interventions.
Caution – Options Expiration This Week
Comex options expire tomorrow and over-the-counter options expire over the next few days. But once option expiry ends, look for gold and silver prices to resume their upward march from last year’s lows. ***ALSO JUST RELEASED: Paul Craig Roberts – Governments And Media Lying To People As Elites Enslave Humanity CLICK HERE.
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The audio interviews with Michael Pento, Gerald Celente, David Stockman, Marc Faber, Eric Sprott, Felix Zulauf, Andrew Maguire, John Mauldin, Egon von Greyerz, Dr. Paul Craig Roberts, Lord Christopher Monckton, Bill Fleckenstein, Dr. Philippa Malmgren, Stephen Leeb, John Embry, Rick Rule, and Rick Santelli are available now. Other recent KWN interviews include Jim Grant — to listen CLICK HERE.