When Will America Come Off Its Steroids?

Date: July 11, 2013

The perceptible chatter in the markets right now is the possible end of monetary easing in America. It seems that the thought the US might dare to stop printing money has got some traders chewing their nails down to the quick.

For the last few years, America, and for that matter, the rest of the world has been enjoying a lavish diet of cheap money served up by the Federal Reserve. Countless billions of freshly created US dollar bills have been pumped into the US economy that has found its way into the property and stock markets of not only the US but around the world too.

Anyone who doubted the impact that loose monetary policy or Quantitative Easing would have on global markets just didn’t pay enough attention during their economics 101 lectures. Money will inevitably find the path of least resistance to places that will generate the highest possible return at the lowest possible risk.

That’s why stock markets and property markets have been on the rise.

However, the US can’t continue to print money forever. At some point it has to stop, otherwise the dollar would become completely worthless. Nevertheless, the timing of the end of monetary easing is crucial.

I remember many years ago teaching my two children how to ride a bicycle. Like many parents before me, I introduced them to the joys of bike riding by firstly fitting stabilisers to their unstable two-wheeled contraptions. It helped to build confidence by keeping their bikes upright under most conditions.

However, we all know that at some stage the stabilisers have to come off. That said, the timing of the removal is vital. If it’s done too soon then you might psychologically scar your child who will be reluctant to ever go on a bike ever again.

But if you leave it too late you could end up with a child who will want to ride with stabilisers for the rest of his or her life. And who wants to see a forty year-old pedalling down the road on a bike with stabilisers.

The same goes for the removal of the economic stabilisers in America. At some point the Federal Reserve will have to reduce monetary easing with an aim to stopping it completely.

But it needs to get the timing right. If monetary easing ends too soon, then it could unsettle the US economy irreparably. If it keeps monetary easing going for too long, then that could have unintended consequences too.

However, when monetary easing ends – and it will – it should be seen as sign of strength rather than a sign of weakness for private investors. It could indicate that banks may no longer require cheap money because they have, at last, repaired their balance sheets sufficiently.

It could also indicate that US consumers have regained their confidence to start spending again. That should benefit manufacturers and exporters around the world as the US economy is, by far, still the largest economy in the world.

Monetary easing will end – America will come off its steroids. That is a given. Interest rates may rise too. And so they should. But these are signs that markets are slowly returning to normal as they continue their epic journey to recovery and beyond.

To your investing

David Kuo

This article is contributed by The Motley Fool Singapore