SONS and DAUGHTERS of BBCMF THE RUSH TO INVEST in LAND and REAL ESTATE.

[mick]

excerpt for two gov't ___ us gov't and da feds.


The US gov and the Fed are 2 separate entities. The US Gov can only
borrow money and always has to repay it with interests.
Second most of the inflation comes from the debt creation currently.

None of this means that the Fed cannot create money out of nothing.
The question is what they do with it. They can lend money (buy bonds)
that they create out of nothing, as in the fractional reserve lending
system, but then banks have to repay it and when they do, this money
disappears. I think this is your point.

Now in case of deflation, where a chain of defaults takes place. If a
bank defaults on the money lent by the Feds, the money lent stays in
the system and the Feds are never repaid. Further to avoid this, the
Fed can make emergency loans to the bank. For the bank this is not a
loan to consume or to satisfy customers who want to buy houses, but a
loan to stay alive. The availability of this kind of loan would make
it difficult for many banks to go bankrupt as they did in 1929.
Through this the Fed can probably at least limit the damages of
deflation if things come to the worse. The Feds can also lend money to
the gov, and though people don't like deficits, there may not be much
choice in a Depression.

What the Fed cannot do is force people to consume. They can foster
enough debt creation to make it easy for them to do so, but if the
psychology reverses, this control may not be enough. This is why I
think there may be phases of deflation.

The influence of foreign central banks is also interesting. I read
that the trade deficit protects the US from inflation, because the US
can export deflation in the same way it exported inflation for some
time. i.e. if the consumers stop to buy, anyway things are not made
here, so China (and the others) would suffer (at least a part of the
problem). Of course the reverse argument is that if the Chinese
government sees this demand go away and decide to spend its
(remaining) surplus internally to foster internal demand instead of
subsiding the US, then the interest rates in the US might go up,
causing for deflation not less. They prolong the credit cycle by
buying dollars but may make the end worse when they stop to do that.
This is the critical inflexion which is not there yet.