How QE is still driving the US economy

On October 29, 2014, the US Federal Reserve officially announced the termination of its quantitative easing (QE) policy – as had been widely anticipated for many months prior. In the lead-up to and immediate aftermath of the termination of QE, a great many commentators in the financial media predicted doom for the US economy and stock market as a result of the termination. These predictions were based on the erroneous inference that the growth of the economy and gains in stock indices such as the S&P 500 (NYSEARCA:SPY) and the Dow Jones Industrial Average (NYSEARCA:DIA) during the prior years had been primarily due to QE. It also was based on a completely misguided theoretical understanding of how QE impacts the economy and the stock market.

As I explained in detail in this radio interview, and in various articles on Seeking Alpha, the impact on the US economy and US stock market of QE, although significant, has tended to be misunderstood and exaggerated – particularly as it relates to the period between 2010 and 2014. Most importantly, I have argued that the expansionary impacts on the US economy and stock market of the terminated QE program would actually accelerate in the one- or two-year period after the conclusion of QE.

In this article, I will provide a brief overview of how QE is still with us and how it will impact the economy and stock market in 2015.

The Effects of QE Are Accumulative

QE was an operation that injected liquidity into the US economy. In its initial phase, it was merely replacing liquidity that was destroyed during the financial crisis. However, in later iterations, QE brought about a historically unprecedented accumulation of liquidity relative to the normal requirements of the US economy. As I detailed in this article, US businesses and households (particularly the wealthiest households) in the aggregate are currently holding record amounts of liquidity relative to their incomes. More specifically, the total stock of liquidity accumulated by households and businesses surpasses by record amounts what they need under normal economic conditions.

To read the rest of this article, visit the Seeking Alpha website. Publication does not imply endorsement of views by the World Economic Forum.

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Author: James A. Kostohryz is CEO of Portfolio Strategist at JK Investment Consulting

Image: U.S. dollar notes are seen in this picture illustration. REUTERS/Nicky Loh