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News Link • Economy - Economics USA

How Malinvestment Poisons The Entire Economy

•, by Charles Hugh-Smith

Malinvestment--the systemic consequence of the Federal Reserve's policies of near-zero interest rates and abundant credit--doesn't just inflate destruction asset bubbles: it poisons productive assets and the entire economy.

Malinvestments arise when credit is cheap and abundant, as it costs speculators very little to borrow money for gambles, and they can in essence buy lottery tickets in the asset bubble of the day without having any skin in the game, i.e. without having to put any of their own money at risk.

ï»The classic example in the previous housing bubble were speculators who bought houses with no-down, no-document low-interest "liar loans": with no money down and a modest interest-only mortgage payments, speculators could buy a lottery ticket in the housing mania for almost nothing, and maintain their gamble for a very modest monthly sum. Given the potential for an enormous gain should the gambler find a greater fool to buy the house in a few months, this was an entirely rational and indeed attractive bet.

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