A rather complacent article on the BBC website, What is driving the global stock market rally?, illustrates some of the circular thinking common on this subject. The basic thesis is that QE is driving stock markets up, because the QE asset purchases are driving down the return on "safe" government bonds. [Ha! remember when they used to call the short term government bond rate the "risk-free" rate?]
Althought he article goes on to find additional reasons for the stock market rise, it's its consideration of QE that I find most alarming, so I'll just make some notes on it here.
Firstly, the author asks how long QE can go on for:
Will this money supply continue?
Well, maybe not forever, but in the medium term, yes.
The reason it will continue is, appartnly, becuase governments will want it to: the BoE, the Fed and the BoJ all want to stimulate their econimies, and the QE will continue until they are popping. No thought of unintended consequences. Indeed it's difficult to see what's intended and what isn't. The initial impetus behind QE was said to be, when it was being considered, that it would spur banks to lend to firms, thus stimulating the economy. This famously hasn't happened, so I guess we are now supposed to think that the intention is to persuade people to spend by reintroducing a feel-good factor from rising asset prices, by creating bubbles in the stock market and eventually the real estate market too. God help us, we know how the last one ended.
The only thing I can see here is froth. Simultaneous QE in every continent, leading to simultaneous stock market and housing bubbles. When these burst, it will be like nothing we have ever seen: the world's first truly global bubbles, and several of them at the same time, likely accompanied or swiftly followed, by runaway inflation.
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