Get Ready for the Election Season and the End of QE2

Most economists believe that no serious disruption to the economy (or markets) will occur when the Federal Reserve ends QE2 (the printing of $600 billion) in June. They also believe the economy is on a sustainable growth path (but below trend growth levels) and that the economy will continue to improve over time.

Sure, there are some who think the government needs to print even more money to encourage employment growth and wage increases (besides, debt is not a problem and interest rates are low.) And there are a few who think the Fed should raise interest rates now to deter inflation and reduce taxes to incentivize employment (besides, spending is not the problem; debt and low interest rates are the problem.)

Since this view (borrow and spend) is what got us into this problem and is currenty keeping the economy levitated; it does not make sense that the government can simply stop increasing the money supply and we all go merrily on our way or we would have stopped printing money long ago.

Unless savings increase enough to fill the gap left by the Fed (unlikely), GDP will decline (maybe after some lag time) and politicians will panic (elections are coming! elections are coming!) We will be subjected to a news cycle of endless attack speeches, ads, vetoes, etc. about the debt ceiling, budgets, etc. Not exactly tranquility.

Also, with GDP declining, banks will be less inclined to lend (so neither savings or loans will make up for reduced government spending.)

Now, add in a slower-volume summer market and you have the ingredients for a very volatile market full of surprises (and counter surprises.) One must be nimble short-term. Longer-term, any time there is a dip in GDP or a stock market dip, I believe the government will do the only thing it knows how to do, borrow and spend.