The end of free money and the upcoming stock market collapse / by kevin murray

The government likes to come up with all sorts of terms that the average citizen really doesn't understand such as Quantitative easing (QE) which it commenced in 2008, and ended in 2014, of which QE essentially is a monetary policy in which the central bank of the United States, also known as the Federal Reserve, purchased assets, that is primarily bonds, thereby creating new money out of thin air, to the tune of approximately $4 trillion during those years, of which, the purpose of this QE was to lower the yield on those bonds and thereby lowering the cost for institutions to borrow money, while at the same time increasing the money supply by those newly created bonds.  So, in simple terms, the Federal Reserve basically printed $4 trillion which has now become part of the economy, of which, the main impact of this appears to have been lower interest rates and a stronger stock market.


In point of fact, QE essentially acted as the prop for stock prices, because corporations were able to borrow billions upon billions of dollars at unprecedented lower interest rates, not so much to expand their businesses, which they did to a certain extent, but to utilize that money to buy back public shares of their stocks at unheard of levels which served as a very successful prop to boost those public share prices, because the reduction of the quantity of public stock shares even with the exact same dollar earnings by the corporation, equates to a higher earnings per share ratio which is a fundamental basis that investors look at in procuring a certain stock to begin with. 


So too, historic low interest rates, increases leverage by financial institutions, corporations, and investors, for when the cost of money is very, very low, then in order to make money on any investment, the hurdle to do so is much lower.  That is to say, when the cost of borrowing money is only 1.5% or even lower, than assets that are invested in need to only return something greater than 1.5% per annum in order to turn a profit.


All of the foregoing, should be taken into account, for when QE becomes Quantitative Tightening (QT), of which QT is defined as the Federal Reserve essentially allowing the bonds, previously created by QE  to mature and then simply to receive that cash and thereby to use that cash to pay down the $4 trillion previously issued during the QE phase, one should expect that interest rates will rise or normalize, which they are doing at the present time, as well as that assets, especially like stocks which are dependent upon both cheap money and free money to accelerate in value to new heights, to subsequently drop, and possibly to drop quite precipitously.


Another way of putting it is that it is not conceivable that if QE is foundationally the very reason why stocks rose and rose considerably, than QT must by nature, be the very reason, why stocks will fall, and fall considerably.  How the stock market plays out over the ensuring few years will tell the tale, but no doubt, cheap and free money always inflates assets, while more expensive money most definitely deflates assets, as well as punishing those that need to be in debt in order to grow their business or to pay their bills.