“I’ve made a big fuss over QE in recent years and yet the market continues to plough higher. I often have people ask me:
“Why does QE make stock prices go higher if there’s no fundamental impact?
My answer is always the same. First, look at Europe where QE has also been implemented and stock markets like Greece, Italy and Spain have been decimated. Then look at a country like the USA where QE has been implemented and yet stocks soar. Then ask yourself what the big difference is between these countries? The answer: austerity versus massive deficit spending.
It might be easy to scoff at such an observation, but the reality of the picture is that corporate profits have been largely driven by the deficit in this cycle. As net investment collapsed the traditional driver of profits was overtaken by government spending (see figure 1). This makes sense if you’re familiar with Kalecki and his profits equation. It makes even more sense if you’d been working under Richard Koo’s balance sheet recession theory in recent years. The impact of government deficit spending in such an environment has been massive. All those people screaming about the ill effects of deficit spending and hyperinflation in recent years missed the very explainable and fundamental driver of the profits momentum…..”
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