Tuesday, December 17, 2013

QE Tapering- A Historical Perspective (Repost)

With taper talk once again building..... I thought this historical perspective should not be forgotten. 

Back in 1999, Alan Greenspan floated $40 billion in monetary supply for the sole purpose of providing extra liquidity to avert any problems potentially associated with the change in the calendar to the year 2000, or Y2k. Below you will find the chart of the year-over-year change in the monetary base versus the similar perspective for the NASDAQ for the period between January 1999 through late-2000.

See a pattern here. An overheated market whose upward acceleration was goosed by extraordinary monetary stimulus subsequently crashes after that stimulus is removed. More appropriately, just $40 billion is removed. I would not be as bold as to predict an impending market crash here and now, as no one is predicting an outright reduction in the monetary base. However, if a $40 billion reduction in monetary base led to a 10%+ crash in the NASDAQ, what sort of volatility could one expect with $10 billion to $15 billion a month reduction in QE?

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