I hear this claimed again and again, and I've never understood what people are saying. Why will a reduction in money printing cause a stock market crash? And why doesn't the intense money printing today cause a large amount of inflation? None of these two things make sense to me.
Share prices are based on the last price paid. If there's a constant supply of new money from "nowhere", it's easy to keep bidding up the prices of existing assets.
Put another way: the effect of $80 billion / month doesn't have to be $80 billion / month. It can be the effect of using that $80 billion to drive up the prices of existing assets. If I have cheap money and feel like Example Company Inc is worth bidding from $100 to $500, even if I only buy a few percent of the company, I just quintupled its headline value.
That's the argument. I think it's a little simplistic that the "only" reason for the current bubble is US Federal Reserve policy, insofar as bubbles can form without an inflationary monetary policy. But it's not totally unreasonable to assume that it's playing a contributory role. It can certainly make any bubble a more bigger and frothier bubble.
Whether federal reserve policy is blowing up a software bubble has more to do with who gets the money than with the fact that money is being printed.
Hyperinflation's been around the corner for 5 years now. Obviously the doomsayers (and classical economics) are failing to account for some massive deflationary pressures. If current policy gets us <1% inflation, it stands to reason that normal policy would have us in a deflationary state. Hyperinflation is not about to show up and wreck everything.
But as far as who gets the money.. there's certainly the possibility that capital's being allocated in a suboptimal way due to banks getting the money, as opposed to I dunno, public works programs or handing out $100 bills on the street. (IMO fed policy-makers would be fine with the latter two, but they're less politically palatable in some sick way)
Australia's Federal Government did a one-off $900 handout at the start of the GFC. Later studies showed that it was mostly diverted into paying off credit cards, so it didn't actually have the stimulatory effect that was hoped for.
The problem with the blunt instruments of monetary and fiscal policy is ... they're blunt. And usually come with nasty side-effects. Again, in Australia, the Reserve Bank has been steadily pushing interest rates down to try and get our dollar to fall. They're not having much luck in that department, but they have kicked up a surge in Sydney house prices due to record low mortgage rates.
As for there being a software bubble, I think there is such a thing, separately from any effects of US monetary policy. But I also expect that monetary policy is making it more spectacular. The S&P 500 has been surging ahead of other economic indicators, that's usually a sign that there's a lot of money swirling around looking for somewhere to go.
I definitely agree that there's money swirling around looking for somewhere to go.
We're kind of in no-mans-land for political economy punditry on this one -- nobody knows how the hell to explain the current situation, Econ 101 is totally insufficient.
I'm inclined to think that with the unemployment rate and stagnant wages for the bottom 80% of income earners, coupled with all this extra money swirling around, we need to find a way to connect the two, ramp up demand, get a positive cycle started that way. No idea how to do that, though.
As far as whether there's a software bubble.. I dunno. Maybe there's a VC bubble, because of the aforementioned money, but I think twitter would be getting investment while being unprofitable in most economies that have a facebook to point at.
>Why will a reduction in money printing cause a stock market crash?
Because asset prices aren't being supported by underlying capital accumulation from the sale of goods to meet demand. They're being supported by flooding the capital market in cheap money. The underlying "real economy" of nonfinancial goods and services is pretty much still in recession, and the labor markets and aggregate demand with it.
