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End QE and Pop the Stock Bubble

June 24, 2014 in Economics

By David Howden

stocks 1

Writing in the Financial Times this weekend, John Authers is concerned with the lack of volatility in the stock market.

More remarkable than the market’s level has been its consistency. The US not seen a correction (a top-to-bottom fall of 10 percent or more) since the turbulence in the summer of 2011 that followed the decision by Standard & Poor’s to downgrade US sovereign debt from triple A…. This is strange. Markets seldom go up in a straight line like this. Progress is made bumpily, with rallies interrupted by sharp selloffs.

Since the Fed started its QE programs the stock market has been pretty buoyant. This is especially true with the latest and ongoing round known as QE3, which covers most of the period Authers is concerned with.

Indeed, the upward trajectory in the stock market follows the Fed’s quantitative easing programs almost perfectly. With the recovery on Main Street still sluggish, the Fed can at least claim that it has given Wall Street some relief.

Indeed, the relationship between the M1 money stock and the Dow has been about as good as any statistician could hope for upon first glance.

Of course, with the Fed starting to taper its easing program there is a fear that the luck of the stock market might run out. Of course with the Fed still committed to increasing the money supply by $65 bn. a month, it doesn’t look like Wall Street’s stimulus package is over quite yet.

None of this bodes well for the rest of us.

A stock market artificially propped up by the Fed’s loose money policies is sure to end badly. Ending the seemingly endless credit creation and popping this bubble is the lesser of two evils.

(Originally posted at Mises Canada)

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