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The overall consensus is, the US government will be announcing further stimulus measures in the very near future and this is expected to have a net positive impact on global stock markets in the near term. But will the impact of quantitative easing be an overall positive for stock markets as we continue to trudge slowly toward economic stability? Views on this remain divided.
Firstly, injecting more money into the economy is designed to create a number of positives for any given market. Employment: More money means more spending, and more spending creates more jobs. In times of recession, the labour market is one indicator used to monitor the strength of the economy. Unfortunately, as companies experience a tightening of purse strings, one of the first areas to feel the pinch are the employees. Cutting the amount of pay cheques at the end of each month is a sure way to trim the balance sheet very quickly. Increased unemployment creates increased welfare and pressure on the economy. By injecting further cash into the economy, the aim is to ease the pressure on the jobs market and keep more people in work for longer.
Housing: We live in a debt fuelled economy. Most people have a mortgage. Servicing that mortgage can be a mountainous task in itself. Excessive debt was a major reason we found ourselves in this mess and remains the key reason it will be so difficult to work our way out. As money becomes scarce, the difficulty to pay a mortgage on the family home can only increase. The rate of foreclosures in the US is already astronomical. Avoiding another debt fuelled recession remains America’s key priority.
Growth Domestic Product and Inflation: The true measure of the health of a nation and a very delicate relationship. GDP is comprised of the value of all the goods and services produced within a country’s borders. This determines the standard of living experienced by the overall nation at that point in time. This ties in with inflation which in the US, has not yet posed a problem in the post GFC world. In fact, it has been quite the opposite. To curb inflation, the most common approach is to raise interest rates. (Australia is a prime example). In a time when deflation is an issue and interest rates are near zero, then quantitative easing measures become an obvious option to stimulate demand for goods and services.
The Other Side of the Coin: We then have those who maintain a slightly more opposing view to quantitative easing. Those who protest economic stimulus as a very short-sighted measure which simply prolongs the economic recovery.
We have established that quantitative easing creates more money and more jobs. This same easing also creates an oversupply of currency and de-values the dollar. –Yet another reason why we are likely to see the Australian dollar overtake the US in the near term. To add to this, maybe injecting money into the economy is simply sweeping sand over the problem rather than taking steps to fix the issue at hand? –A very valid argument and one which holds itself to the turmoil the Japanese economy has experienced for a number of years.
In conclusion, maybe a second round of quantitative easing is simply prolonging the recession we ‘had to have’. Rather than fix the issues at hand, we simply buy a little more time. On the other hand, printing more money may have softened the blow, extending it over longer time period and allowing us to work on these issues at the heart of the global financial crisis, one by one.
Whichever view you hold, the following months and most likely years will prove a very interesting time for equity markets. ValueGain allows you to scan markets for those companies which have so far weathered the GFC storm and are most likely to outperform in the future. The DividendKey which is run both in Australia and the US teaches you to look for specific ratios and determine the strength of a company based on a sound fundamental approach which you can apply to all of your investments.
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Happy Investing
Lachlan McPherson
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