The end of QE2, and the unwinding of government and Fed stimulus, will lead to a massive depression according to former Fed economist Richard Koo.
In a report on May 17th by Mr. Koo regarding Federal Reserve stimulus and Quantitative Easing programs, much of the current run in the stock market, equities, and commodities has been primarily achieved through money printing, and not by market and economic growth.
The only remaining destinations for these funds were equities, commodities, and real estate. Real estate had just been through a bubble and remained characterized by heavy uncertainty. In commercial real estate, for example, banks—at the request of US authorities—are engaging in a policy of “pretend and extend” and offering loans to borrowers whose debt they would never roll over under ordinary circumstances. That means that current prices do not accurately reflect true market prices. Housing prices, meanwhile, resumed falling late in 2010.
UK house prices have been falling since mid-2010, and the Halifax House Price Index dropped 1.4% in April 2011 alone (the decline was 3.7% on a y-y basis).
The only remaining options for private-sector investors have been stocks and commodities. That, in my opinion, is why both markets have surged since the announcement of QE2. – Richard Koo, Nomura Equity Research
What this implies, and what is also concludes is, that unless the Federal Reserve decides to continue Quantitative Easing (QE3), then every market in our economy will implode in a very short amount of time once the cheap money faucet is turned off. On top of this, the Federal government is in no position to cushion the fall since they no longer have a lawful right to borrow money, or implement taxpayer stimulus now that the debt ceiling has been reached.
Richard Koo has a very long and respected track record on analysis and economic projections. As a former economist with the Federal Reserve, and currently as the Chief economist for Nomura Equity Research, the leading securities house in Japan, his reports and analysis of global and national markets have been vital in advising numerous Prime Ministers during the Japanese banking crisis of the 1990's.
Richard Koo's recent analysis of a coming depression to the US economy should the Fed discontinue its program of QE2 in June is one of the primary reasons that more voices in the financial world are calling for, and expecting an eventual QE3 stimulus program within the next few months.
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