In Cause of inflation: Shanghai bubble case study, we mentioned that the root cause of price inflation is monetary inflation (where fiat currency is being debased in value by ?printing?). As a consequence of monetary inflation, we have price bubbles in the housing market (see The Bubble Economy). Now despite the fact that the housing bubble is deflating in the US and no longer inflating in Australia, monetary inflation (a.k.a. ?printing? of money) is still going on. The fact that stocks, bonds and even art are in a raging bull market shows that the global spigot of liquidity is still spewing out endless streams of money and money substitutes. No wonder central bankers around the world are busy ?fighting? inflation (see Have we escaped from the dangers of inflation?)!

In addition, there is another phenomena that is the consequence of monetary inflation?private equity bubble. You can see the graph for the growth of global leverage buyout activities here:

According to the March 2007 Financial Stability Review of the Reserve Bank of Australia (RBA),

On the regulatory front, central banks and supervisors in a number of countries are attempting to understand the implications of the LBO-private equity phenomenon. On the one hand, private equity clearly has the potential to improve the performance of underperforming firms, and thus contribute to the efficient allocation of global capital. On the other hand, there are concerns that the current boom might turn out to have a number of less welcome consequences. These include: the amplification of a future economic downturn due to a sharp rise in leverage in a period when capital markets have provided debt on very generous terms; a reduction in the flow of information to investors if the size and depth of public equity markets are reduced; and the increased potential for market abuse reflecting the sizeable flows of price sensitive information in the period leading up to the transaction, and the conflicts of interest that can often exist for management and financial institutions over these deals.

In other words, the private equity bubble is causing debt to balloon in the corporate sector. Already, the consumers in the US economy are heavily in debt. The US government is heavily in debt. Now, the corporate sector is building up debt.

Eventually, something has to give.