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To: Les H who wrote (8643)	9/18/2003 12:01:36 AM
From: Les H	Read Replies (2) \| Respond to of 29594

Global Economics: Too Much Debt Joachim Fels Excess liquidity and serial bubbles have led to rapid debt accumulation. For more than a decade now, central banks have nurtured serial asset bubbles by pumping excess liquidity into increasingly deregulated financial markets. Corporate and household debt have surged everywhere. In response to asset price inflation and low interest rates, both corporate and household sector debt-to-GDP ratios have risen sharply since 1995 in the U.S., the euro area, and the UK. The consequence: growing vulnerability to shocks. The growing mountain of debt implies that consumer and corporate spending have become ever more vulnerable to asset price and interest rate shocks. But central banks are unlikely to withdraw the punch bowl. High vulnerability of real economies is likely to prevent central banks from raising interest rates aggressively in the next tightening cycle (if that ever comes), thus perpetuating serial bubbles and debt build-up. Higher debt implies inflation becomes more desirable. The more debt people take on, the greater will be their appetite for inflation, which would help to reduce the real burden of the debt. My worry: an inflationary outcome. With central banks afraid of pricking rolling asset bubbles, and with rising private-sector debt making inflation more attractive, I see a heightened risk of an inflationary outcome for the world economy. morganstanley.com