Sunday, October 26, 2014

Why the FED can not really end QE.

Central banks now are the basic mainstay of stock markets. This is true for Japan, Europe and the US where the plunge protection group keeps stocks from crashing.

The talking heads declared that Q1 was bad because of the cold weather and the recent market swoon was due to Ebola fears. That is of course nonsense. The latest swoon occurred as the FED was threatening to remove the punch bowl. The correlation between money injection by the FED and stock prices is pretty clear by now.

The S&P turned around in 2009 when QE1 was implemented and fell by 13% in 2010 when QE1 ended. The 10 year Treasury Note yield went from 3.85% to 2.38% and M3 went from +2% to -6%. When QE2 ended in 2011 the S&P fell 17% and 10 year Treasury notes fell from 3.2% to 1.8%. Commodities and M3 dove.

So, when QE ends, stocks and all other bubbles deflate, threatening a deflationary spiral.

This shows us that Keynesian economics does not work, but supply side economics does. No mystery why. Keynesian economics puts money in the hand of government, which spends capital mostly for political considerations. On the other hand, supply side economics cuts the taxes of those people who are most productive in the use of capital.

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