by Amanda Howard
After eleven years of nearly uninterrupted advancement, the record-long, QE-spawned bull market is on life support, facing the effects of pandemic lockdown and a massively leveraged global financial system. The sheer scale of the equities super-rally (larger than the dotcom and housing bubbles combined) is dwarfed by the magnitude of the monetary policy experimentation that was its foundation (Figure 1).
[…] Rather than spurring real economic gains, the main outcome of the Federal Reserve’s unorthodox Quantitative Easing (QE) program has been to support, and further extend, the bloated and fragile debt grid, and generate exuberance in interest rate–sensitive risk assets like the stock market and real estate, fueling the largest wealth gap since the 1920s. It does this by suppressing the price of risk. Artificially low interest rates encourage unproductive debt accumulation and maintenance, and funnel money out of safe assets (through induced zero or negative yields) and into higher-risk assets with present value income streams that look a lot rosier in a depressed cost of capital environment. Known as the portfolio rebalancing channel of QE, this phenomenon drives asset value distension, malinvestment, and excessive risk taking.