If you believe that money printing is the answer; that governments can continue to increase debt levels ad infinitum; that austerity in Europe will propel their economies, unfazed, onwards and upwards and that China will eventually get the hang of capitalism; then I would agree that equity markets look like a steal. In P/E terms the FTSE is at half the level it was at 10 years ago.

But according to "Economics 101", quantitative easing, on the heroic scale we have witnessed thus far, should already have led to rampant if not hyper inflation. That it hasn't is down to the continuing decline in the velocity of circulation of money. In simple terms the banks aren't lending (compared with the amount of money available to them), but instead are punting on financial assets, which is where "inflation" is ending up and benefitting their balance sheets… Charles Hugh-Smith put the Fed's actions into context very well, if indelicately for some, on his recent Of Two Minds website. BoE, ECB and BoJ please take note.

David Fuller's view We cannot know exactly what would have happened without quantitative easing (QE) but there are precedents. The most recent is in Euroland but that is less relevant for two reasons: 1) the single currency; 2) a form of QE was introduced by the ECB last year at what has proved to be the nadir of that crisis, at least as recorded by stock markets.

The next most recent precedent is a far better example of what might have happened, because it did not involve a single currency or any form of QE. I am referring to what is generally known as the Asian Financial Crisis of 1997, although it started earlier and ended later, as you will see from the sample of charts shown below.


For instance, showing monthly charts over 20 years, developed economy Singapore's MSCI fell nearly 65% from its January 1996 peak to its August 1998 low. However, it recovered very quickly before being hit by the bursting dotcom bubble in 2000.

Developed economy Japan peaked in June 1996 and bottomed in October 1998 after a decline of about 44%

In contrast, developing economy Thailand suffered much more, peaking in January 1994 and bottoming in September 1998, following a decline of nearly 88%. Its recovery was sharp but also small before the dotcom bubble burst.

Interestingly, China did not overlap but the Shanghai A-Index fell about 77% between April 1993 and July 1994. However, the Hong Kong Hang Seng Index peaked considerably later in August 1997 and fell 62% through August 1998.

South Korea peaked in November 1994 and fell about 85% to its low in June 1998. It also recovered very swiftly. I could include more but we probably get the picture.

Looking at two Western markets experiencing QE in the current cycle, the S&P 500 Index peaked in May 2008 and bottomed in March 2009, with the help of QE after a fall of about 54%. This positions it between the Asian crisis falls of developed economies Singapore and Japan mentioned above during the Asian financial crisis mostly centred on 1997. Arguably, the S&P also recovered more slowly, on average.

Similarly, the UK fell about 46% between May 2008 and March 2009, the latter date being around the time QE kicked in.

I hasten to add that these are just quick, incomplete samplings and therefore easy to fault. Therefore it would be wrong to read too much into them. However, I think they support my view that QE provided a bit of downside cushioning in 2009. I assume that it also reduced bankruptcies, bank failures and unemployment, albeit at the cost of running up alarming levels of debt which can only be a headwind for future GDP growth. There are also risks for the markets when QE ends.

(See also RiverFront's assessment immediately below.)