Even though the US authorities stopped their quantitative easing programme the same cannot be said of the European Central Bank and the Bank of Japan. As a consequence many people believe we are on the verge of a significant stock market crash with history suggesting that quantitative easing, effectively the printing of money, to the current level does not bode well. A report looking back over 8000 years of human history shows no examples of a “soft landing” for such levels of quantitative easing. Indeed history shows us that even the Romans got it wrong when their economy collapsed!
Interest rate tool is ineffective
Historically central banks around the world have used interest rates as a means to control buoyant and depressed economies. By effectively tightening and releasing the tap of funding they have been able to control/shore up economies although the 2008 US led mortgage crash was a step too far. Even though US interest rates ticked up earlier this week, worldwide interest rates are still at or near historic lows. As a consequence, the interest rate tool used many times in the past is ineffective therefore quantitative easing, the printing of money, is the only way forward.
Building up debt
Quantitative easing simply builds up debt very often to levels which are unsustainable leading to a financial crisis and subsequent stock market crash. The problem is that the European Central Bank, to take one central bank, has no other option but to continue printing money until economies are strong enough to take up the baton themselves. If they were to pull back with quantitative easing tomorrow this would create a nightmare scenario and a bear market which does not bear thinking about.
When you bear in mind that debt to GDP ratios are now at all-time highs in many countries around the world, there are real concerns that there are big problems just around the corner. Will economic growth kick in and take away the threat of a financial collapse or are central banks stuck in a corner, with nowhere to go?
Investors be wary
If we look at the US markets they have been rising to all-time highs on the back of Donald Trump’s presidential victory. This “Trump rally” caught many people by surprise amid concerns that his diplomacy skills were lacking and his economic policies would be left wanting. The truth is that markets and investors have taken much for granted leaving Donald Trump very little room to manoeuvre. Even the slightest doubt or disappointment about his future economic policies would resonate with investors and could possibly see a short sharp shock in markets.
US stock markets touched their all-time high on the back of the Federal Reserve increasing the leading US base rate earlier this week. Since then we have seen some profit-taking amid suggestions that any further interest rate rises, seemingly reflecting a stronger economy, may be delayed until June or later. There will come a point when US stock markets push too far ahead, when over exuberance by investors hits home, at which point we could see a short-term correction. However, talk of a worldwide stock market crash because of quantitative easing would appear to be far from the minds of investors at this moment in time.