For a while debt causes malinvestment and increases demand. However, it being debt, it has to be paid back. Too much debt and it reaches its point of negative marginal returns for investment, production, and consumption, which is when the cycle goes into reverse. Non market based debt (central bank and government debt) and below market interest rates in an economy not saturated with debt will lead to inflation of goods, services, and asset prices. Once saturation is reached (which describes the current economy) deflation and falling prices loom.

How smart do you have to be to write down what someone else does?!?

"The valuation of financial assets follows the deflationary path of glutted goods and services markets, but not always simultaneously."
My question is why don't the same forces that cause malinvestment in assets leading to a glut off goods and services also lead to a glut of demand for goods and services themselves? It should be the exact same inflationary psychology that you describe for assets.

A good question. The valuation of financial assets follows the deflationary path of glutted goods and services markets, but not always simultaneously. Deflation is deflation after all. Financial asset prices can decouple from the real economy for a while, mainly due to mass bullish psychology, but not forever. They are necessarily linked. Debt is subject to the law of diminishing returns. That is why I'm predicting a financial crash; fiat government and central bank debt has reached its point of negative returns. A crash will reconfirm cause and effect, destroying the false but widely held notion that fiat debt can produce ever-rising markets and economic activity. In the long run, a central bank exchanging its fiat debt for its government's fiat debt only produces an excess of fiat debt and deflation of all prices once debt contracts, especially in a system, such as ours, where debt has become the medium of exchange.

This all makes sense, except for my usual question of why the effects of loose money would be confined to the valuation of capital assets and not affect goods and services.

Great article... and it applies to the artificially low student loan rates' also creating a bubble of demand, plus allowing colleges to raise their rates more easily to absorb the resulting excess supply of money in the face of simultaneously-increasing market demand for college class seats.

So now, the MainScream wants to blame the banks, colleges and students for reacting logically to the artificially low loan rates?

Yep, the inmates have taken over.

As an owner of a small business. I am psychologically more desirous of not expanding, but saving assets or selling out before the inevitable collapse comes

Exhaustion of productive investment opportunities? Really?...it's the charge of business to 'Create' value in favor of the end user of it's product or service and the the 'Stockholders' are Not the end user and Money is not the object, it's just a tool.

The observations in this article are spot on and shows in living color the shear lack of creativity, the shear dependence upon the easy way out and the shear idiocy of shuffling about shares in a shell game to only perpetuate business and to avoid the creation of new business...new value.

I've argued before that the beginning of the useful end of big corporations was the advent of professional so called CEO's. They have no connection to the original intent of it's founder; never mind the original founders connection to the people that helped in that creation of value. Professional CEO's no Nothing but the perpetuation of business, not the creation of business.

My other argument is with allowing shareholders a right to vote in the business of that corporation. If the corporation does not perform or worse, actually does harm to it's consumer then; Sell your share's stupid.

Should be Free Market Principles all the way.

Bernanke was on CNBC last week promoting his book and whining about the Fed needing help to stimulate the economy, i.e., reckless spending and over regulation by govt...

if you follow gore's analysis and add my comments, you can see that the Fed's action since 2007 has been to save the big banks and crony corporate companies...the rise in the stock market is totally artifical by Fed QE...there is no value added basis to the market or valuations...what was lost in 2007 is not coming back under the current govt conditions...

only 10% of the $4 trillion dollars has been loaned out by the big banks...and that only to big corporations...why risk money on small businesses that might fail when the govt is paying you to sit on the money...how the Fed will re-absorb the $4 trillion is unknown...

Thanks.

your title convinced me that we had too much to drink. -- j
.

excellent economic analysis by mr gore again...the Fed has loaned over $4 trillion dollars since 2007...to the big banks to keep them solvent...at the expense of savers (zero interest on money)...and paid the banks NOT to loan 90% the money out (except ot big corporations, i.e., crony capitalism(...the result...over 6 million full-time jobs lost and a record 93+ million workage adults looking for work...

Mrs. Clinton, based upon past performance doesn't know her po-po from a small earth excavation.

Of course only the elite are actually able to borrow at zero percent. This policy is a way of transferring wealth, not just from savers, but from all productive people to the political elite.

Didn't Mitt take the position during his campaign that the market should be allowed to find its equillibrium ( allowing some govt-supported corporate restructuring for Detroit) in order to get healthy more quickly ?

2. I thought I heard the Fed was slowly reversing all its Quantative Easing. No ?

Those who cannot remember the past are condemned to be journalists or politicians.

You do not have to be smart to be a journalist :-(

40 centuries of price control history provide amble evidence there is no such thing as "a just price" for goods, services or money.

Rand Paul was interviewed a couple of days ago and he anwered the question by first explaining history and why it was the basis for his current solution to the subject of the question. The interviewer said: "All that is history. What about going forward?"

there's always the Clinton Global Initiative.