Stock markets rocketed up and the dollar fell on the news that the US Federal Reserve had decided not to reduce its planned monthly purchases of US government and mortgage bonds after all. The prices of shares and commodities shot up because investors concluded that the US central bank was going to continue a while longer with its huge injections of ‘liquidity’ (dollars) into financial markets. They had been told by the Fed in June that it was getting ready to cut back on its purchases of bonds starting this month. But the Fed decided to wait.
Part of the reason for the Fed’s delay on beginning the process of ‘exiting’ from printing money was that the bank was still not convinced that the US economy was growing at a sufficiently fast and sustainable pace to get unemployment down and to expand without the help of liquidity injections. Indeed, the Fed reduced its forecasts for US real GDP growth from its predictions in June from a minimum of 2.3% for 2013 to 2% and for next year from 3% to 2.9%.
Since it began its ‘quantitative easing’ programmes back 2010, the Fed has purchased nearly $3trn in government and mortgage bonds, or some 20% of US GDP – a huge injection of cash into financial markets. The Fed was not proposing to stop all further purchases of bonds but merely slow the rate of purchase by a little bit. Yet its decision just to hold off for the moment produced a huge boost to financial asset prices.
This shows that what is pushing stock prices to new highs and fuelling optimism about the world economy is mainly fictitious, based on central banks (the Fed, the Bank of England, the Bank of Japan and others) printing money. This cash flows into the banks and financial institutions, but goes no further. It does not get into the ‘real economy’, the productive sectors. The economics of ‘quantitative easing’, ‘unconventional’ monetary stimulus, has been a failure in kick-starting the world economy
(see my posts, Down the Jackson Hole, https://thenextrecession.wordpress.com/2013/08/28/down-in-the-jackson-hole/
and The failure of QE, https://thenextrecession.wordpress.com/2013/06/26/the-failure-of-qe-2/ .
QE has just fuelled a new property and financial market boom that last time eventually burst into collapse. The productive sectors of the capitalist economies remain in the doldrums. It suggests that when the Fed and other central banks do pull the plug, the world economy could slip back into a new slump.