The Federal Reserve's move to eliminate its monthly asset purchasing program will cause a "collapse in asset prices and a severe recession," according to economist Michael Pento.
It will be all part of the end of the so-called wealth effect touted by former central bank Chairman Ben Bernanke, who asserted that rising asset prices in the stock market and elsewhere would help boost confidence and generate economic activity, Pento charged in a blog post Monday.
The longtime Fed critic said the withdrawal of quantitative easing will cause a sharp decrease in housing prices and stocks despite consensus predictions that the effects will be minimal.
Very soon the amount of QE will be close to, if not exactly at zero. And without banks supporting asset prices by consistently creating new money at the behest of the Fed, stocks and home prices have nowhere to go but down.
I anticipate the reduction of the wealth effect to intensify as the taper progresses. Since the economic "recovery" was predicated on the rebuilding of asset bubbles, a long delayed and brutal recession will start to unfold later this year.
The real question investors need to answer is to determine how long Janet Yellen will wait before admitting the economy is completely addicted to QE, and that there is no escape from the Fed's constant manipulation of money supply growth and asset prices.
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