Since 2008 stocks have risen dramatically throughout every stage of quantitative easing but, when the various phases of quantitative easing have ended, stocks have always responded by declining substantially…only to eventually start rising again was a new round of quantitative easing. So what will happen this time?
After all this time, many Americans still don’t understand what quantitative easing actually is. Since the end of 2008, the Federal Reserve has injected approximately 3.5 trillion dollars into the financial system. Of course the Federal Reserve didn’t actually have 3.5 trillion dollars. The Fed created all of this money out of thin air and used it to buy government bonds and mortgage-backed securities.
If that sounds like “cheating” to you, that is because it is cheating. If you or I tried to print money, we would be put in prison. When the Federal Reserve does it, it is called “economic stimulus”.
The overall economy has not been helped much at all…[however]. Instead, what all of this “easy money” has done is fuel the greatest stock market bubble in history.
As you can see from the chart below, every round of quantitative easing has driven the S&P 500 much higher and, when each round of quantitative easing has finally ended, stocks have declined substantially.
The chart above tells only part of the story. [As the chart below illustrates,] since April 2013, the S&P 500 has gone much higher:
If someone from another planet looked at that chart, they would be tempted to think that the U.S. economy must be expanding like crazy but, of course, that is not happening. This market binge has been solely fueled by reckless money printing by the Federal Reserve. It is not backed up by economic fundamentals in any way, shape or form and now that quantitative easing is ending, many are wondering if the party is over…
Everyone knows that quantitative easing was a massive gift to those that own stocks, so how will the stock market respond now that the monetary heroin is ending? We shall see. Meanwhile, deflationary pressures are already starting to take hold around the rest of the globe…[Indeed,] if the Federal Reserve and other global central banks were not printing money like mad, the global economy would have almost certainly entered a deflationary depression by now.
All the Federal Reserve and other global central banks have done is put off the inevitable and make our long-term problems even worse. Instead of fixing the fundamental problems that caused the great financial crash of 2008, the central bankers decided to try to paper over our problems instead. They flooded the global financial system with easy money, but today our financial system is shakier than ever. Most people do not realize how vulnerable our financial system truly is. It is essentially a pyramid of debt and credit that could fall apart at any time:
- 10% of the biggest banks in Europe have failed their stress tests and must raise more capital
- the “too big to fail” banks account for 42% of all loans & 67% of all banking assets in the United States and
- 5 of the “too big to fail” banks each have more than 40 trillion dollars of exposure to derivatives.
Without…[healthy] banks, we essentially do not have an economy [yet,] instead of being careful, the big banks have taken recklessness to unprecedented heights…transforming Wall Street into the biggest casino in the history of the planet.
There is no way that this is going to end well. A great collapse is coming. It is just a matter of time.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://theeconomiccollapseblog.com/archives/how-will-the-stock-market-react-to-the-end-of-quantitative-easing (Copyright © 2014 The Economic Collapse)
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