Home > Main > Prag Cap: Fed “Set the Table” for market Crash with QE II

Prag Cap: Fed “Set the Table” for market Crash with QE II

August 9, 2011

Cullen Roche knocks another one out of the park.   He goes through the crystal clear logic of how the Fed’s actions are directly responsible for the recent market action.

“A relatively harmless program (QE2 was nothing more than an asset swap with no true transmission mechanism that would alter either the private sector money supply, private sector net financial assets or the real economy) was incorrectly described as “debt monetization“, “money printing“, “stimulus” and other descriptions that implied QE2 was having a massive impact on the real economy through various channels. This couldn’t have been farther from the truth.

What QE2 definitively caused was a massive distortion in investor sentiment due to a general lack of understanding. Equities, commodities and other markets appeared almost entirely invulnerable as long as there was this belief that the Fed was backstopping the market. In other words, the Bernanke Put was in full effect. I have described the negative impact of the Bernanke Put on several occasions (see here and here) over the last year.”  [Bold mine]

The distortion was huge, and Cullen is right on the money with his analysis.  QE II didn’t do anything but change investor sentiment for investing in the inflation trade.

Now that it is clear we are nowhere near hyper-inflation and should fear the return of deflation, this trade is over.  The speculative bid in some asset classes disappeared.  Hence, the market tumbles.

One of the cool things about MMT is that it uses real world stocks and flows as the basis of the theory.   Trading is – in part – about knowing the flows.  MMT hugely helps to identify these flows.

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