Can the US Economy survive without the Quantitative Easing ?

The United states media have been reporting for a few weeks now that the fed will begin to tapper its bond purchasing programme and stop trying to stimulate the markets with short term growth. The question is has Quantitative Easing gone on for too long and has the US become reliant on market stimulation from the fed ?

Ever since 2010 the Federal Reserve has been increasing its bond purchasing programme up to £85 Billion per month in order to quickly get cheap money into the system and lend it out to business so they can grow. Quantitative Easing seems a relatively good plan at a first glance as it quickly makes markets happy as everyone is more optimistic, but what many people haven’t noticed in the past is that QE can cause many problems for an economy (see article of germany QE :click here).

  

As this monetary instrument has been executed for so long and at a massive rate (see graph ), many investors and economists are starting to state that the markets are becoming to over-reliant on this stimulation in order to grow. Without this constant intervention of the federal reserve investors believe that many stocks will depreciate in value as everyone is less optimistic due to lack of stimulation by the fed.

However this may not be bad thing , this is because Quantitative Easing has in many cases caused the stock market to be over-valued and prices are much greater than they should be. when the Fed does start to tapper its purchasing programme we will likely see the markets correct themselves and stocks will return to moderate prices.

Already the plans of the federal reserve have started to effect the markets with the DJIA finishing down the day the news broke. Many investors are fearing that the stock market will correct itself and send stocks down to their correct values if there was no stimulus. Due to this many investors have probably adjusted their portfolios away from the US and looked for defensive investments such as the government bonds which finished high on that day.

Dow Jones Industrial Average June 19th 2013

The stock market has seen some bad news in recent weeks with emerging markets and the federal reserve. but I believe that tapering Quantitative Easing now is the best decision as the US Economy according to low unemployment and increasing growth has started to recover. I believe that it is important for the economy to survive and grow without the Feds constant stimulus which only inflates stock prices creating an illusion of growth.

I also believe we may see this happen in other countries in the future especially emerging markets where central banks have stimulated their economies to attract investors, the banks will then have to taper their QE in order to keep the currency at a good level which causes their markets to correct themselves.

Daniel Butler


Sources : Marketwatch, Yahoo Finance , http://theeconomiccollapseblog.com/archives/quantitative-easing-did-not-work-for-the-weimar-republic-either