The end of the government Ponzi scheme that has held up our faltering economy is coming. Only the timing is difficult to predict. One of the many signs is the diminishing returns to Federal Reserve monetary action.
According to Phoenix Capital:
all in all, the Fed’s supplied a minimum of $4 TRILLION into the markets since 2008 (I’m not accounting for the trillions more in deal that have not been made public). And the S&P 500 is at roughly the same level as before the Bear Stearns collapse.
Phoenix points out that each subsequent injection by the Fed has produced diminishing returns in terms of its effect on the stock market:
So $10 billion of Fed money today is worth just over half (62%) the market gains of $10 billion in Fed money back in 2009. Put another way, every new injection of $10 billion from the Fed is producing less and less results.
The stock market is where it is not based on the horrible economic fundamentals, but on the liquidity supplied by the Fed. That has supposedly now ended. What will keep the markets up in its absence? Nothing that I can think of.
The stock market will roll over at some point soon. Without additional QE it seems inevitable. When it does, QE, under some other name will be revived, but it is unlikely to stem the fall. According to Phoenix:
At some point, and I cannot say when, the market will begin to realize that the Fed cannot backstop the entire financial system. When this happens, THEN the REAL Crisis will hit and it will make 2008 look like a picnic. The reason is quite simple: the next Crisis will be a Crisis of Faith pertaining to the US Federal Reserve.
I agree with their analysis although believe the crisis will pertain to the entire US government, not just the Fed. Despite the most massive stimulus the world has ever seen, the government has been unable to right the economy. It is incompetent and insolvent. Without QE it will soon be illiquid. The government will be unable to sell Treasury Bonds in the credit markets in amounts large enough to fund the continuing deficits and the rollover of existing debt.
The Fed will be forced back into buying Treasuries so that government checks can continue to go out.
No meaningful agreement is possible on spending cuts or tax increases. We will spiral to bankruptcy just as Greece. The only difference is that we will continue to print money on the way, opening up the possibility for a hyperinflationary collapse. In that sense, the Greeks are in a better position than we are.
