Which can become permanently if you don't handle the situation properly (get killed on your way back to your body, or you leave without retrieving it or something).
I don't know what that guy was talking about with "no penalties".
Also didn't you lose experience points when you died? At higher levels that could be hours/days of work gone, even if you're not playing on Hardcore.
You actually couldn't lose anything but exp if you died. The most you could really lose was your potions. All your gear would stay on your corpse, and if you left the game, your body would be on the ground in town the next time you joined a game. All your stuff stayed in your inventory too, but if your inventory was full, all your potions would fall on the ground, because your potions go in your belt, and you lose your belt on your corpse, so the potions have nowhere to go. But yea, Exp.
The only way you could lose your gear, was if you went to retrieve your body, accidentally picked up some gear that auto equipped to you, and you picked up your body, but had no room for all of it. You couldn't have more than one corpse, so if you grabbed part of your gear, but still had a corpse on the ground, you could die, and that's when everything would just fall off of you. Worst feeling ever. Better hope you had a buddy nearby in the game to grab your stuff for you before the vultures come.