Thursday, November 4, 2010

Money Printing and the Stock Market

The S&P has nearly doubled from the recent low of 666.  The Insider selling/buying ratio is at record highs.  The Mutual fund cash levels are very low.  People think that inflation will drive up stock prices; however, the first thing it does is drive up interest rates which drives down bond prices.  As bonds get cheaper and with higher yields people move from stocks to bonds, which lowers stock prices.  So the relatively high P/E ratios we see with low interest rates will drop as interest rates go up and stocks go down. 

Warning, this is not investment advice, just educational.


  1. Hey Vincent,

    I was reading your work here ( and found it interesting. I was actually on a mission trying to understand what exactly Ben Bernanke is doing with QE2. His speech at Jacksonville aroused my suspicion and I somehow ended up on MMT sites. MMT really makes no sense to me as it endorses fiat money, a concept that has failed so often that I fail to see any point in defending it.

    Still, the speech from Bernanke is the following:

    "“What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed. Now the question is what happens the economy starts to grow quickly and it’s time to pull back the monetary policy accommodation. There are several tools that we have”

    So is bernanke lying or is this really a swap? Thank you!

  2. In Bernanke's "helicopter paper" he talks about "printing press or the electronic equivalent". If he credits a bank's reserve account at the Fed he does not yet have to print real paper money. But if that bank were to then withdraw the money he would have to really make some paper money. The fact that things are usually done on a computer, and not with paper, is just the "electronic equivalent". So Bernanke has deposited money out of thin air to the banks account on the computer at the Fed and gotten the bonds. Bernanke's main goal is that people not understand he is "printing money", or its electronic equivalent. He is swapping something he conjures out of thin air for bonds. In the normal use of the term, he is "printing money".

  3. If bond prices go down and interest rates up, then I would expect stocks to go down. If however, the dollar drops a bunch relative to other paper money and gold/silver, it might be that the stock market does not go down. Note that the Fed is fighting to keep interest rates down, so maybe the way things will play out is that the dollar will drop before interest rates go up. Crystal ball is foggy.


Looking for polite debate on ideas. Never attack a person. Be nice.