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Finally, the US stock market might be running out of steam after six years of the US Federal Reserve's "easy money". In August 2007 when the subprime crisis hit the US market, the Fed had plenty of firepower. Fed fund rates stood at 5.25 per cent and the Fed's balance sheet was only $850 billion. After the Wall Street crash in 2008 the Fed engineered a massive bailout, at one time printing $16 trillion to rescue the US and other global banks. Interest rates were cut sharply, to 0.25 per cent, a level unchanged now for seven years running. And the Fed launched the quantitative easing (QE) programme to buy out mortgage-backed securities from banks so as to keep the banks and the US government afloat.
We all know that what goes up must come down. The US stock market has benefited from the QE programme, which uses easy money to trigger speculative buying of equities. Now, seven years later, there are fears that US stocks can't continue to rise forever, as judged by the swing of equity prices over the past week or so. The trouble is that this time the Fed has run out of ammunition. The interest rate, which is almost zero, can't be brought down further. If a crisis were to hit the US market again, and it will, the Fed will be caught without any rescue tools. Some say the market could crash 50 per cent. Others, such as "The Death of Money" author James Rickards, argue that it could collapse by 70-80 per cent. When will it happen? Nobody knows for sure about the timing. What is certain is that the US is engaging in several battles all at once, each posing huge risks to global stability