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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (61142)	12/28/2006 12:47:19 PM
From: mishedlo	Read Replies (1) \| Respond to of 116555

An Email from John Succo on Minyanville on part 1: This is good. A few comments. As central banks rain liquidity (credit) down on markets, its long range effects eventually cause the very thing central banks are trying to avoid: deflation. The reason people don’t understand this is that it is cumulative: the accumulation of debt is in itself inflationary, but at a certain point it becomes unmanageable. Why is this? Easy or free money (when central banks drive real interest rates below inflation rates) is irresistible. It wouldn’t be if people managed risk properly but they do not. Easy money causes competition for “projects” to increase: companies with free money take risk with it for less and less return. We are seeing deals getting done in LBO land and commercial real estate being built using very aggressive assumptions and low cap rates. With all that “money” out there rates of return drops dramatically. Everyone is starved for income. At the very time that income and returns are dropping debt is increasing. Less income with more debt means that eventually it gets impossible to service that debt.