WASHINGTON, D.C.  Feb. 7 (DPI) – Monday’s record-setting selloff of US stock indexes was a jarring reminder that economic reality can disrupt the madness of crowds, after years of low-volatility up, up and away. The major media – The NYT and the WSJ – are this week suddenly making much of the end of artificially low interest rates, which of course have driven the equally artificial run-up in the stock market.  They have also made a lot of Trump’s myopic and ill-advised remarks in recent months attempting to take credit for the run-up.

Of course, the markets’ “sugar high” is something that Wall Street has been long aware of, and most professional fund managers have been cautiously awaiting an event to trigger a reversal.  Last week the WSJ reported that short-term yields on US government notes were creeping upward, a sign that the government, only weeks after passage of historic tax cuts, will have to pay more to finance its obligations. Monday’s historic 1100-point drop in the Dow – the largest point drop ever, but a decline of only 4% in percentage terms – was a momentary dose of reality for a market whose metrics look a lot like those of pre-crash 1929 and 1987.

There’s plenty of debate among economists and ordinary people about Trump’s policies of tax cuts and deregulation driving further growth, at a time of full employment, and at a time of an on-all-cylinders expansion of the global economy. But many still recognize that, if the markets take a dive and push the global economy into recession, the Federal Reserve may not be in a position to help as it did a decade ago.

The Fed of course is still trying to reduce its balance sheet after years of so-called Quantitative Easing – a program of bond-buying intended to inject cash into the post-2008 financial markets, but to many was a politically acceptable way to print money.

The program has certainly helped the US economy – but the problem now is that the Fed is only slowly selling all those bonds it owns. It’s $4.5 trillion balance sheet has barely budged in recent months. Moreover, it has announced plans to raise short-term interest rates as signs of inflation appear.

Long and short? The Fed now is in no position to take action to stimulate the economy again, at least the way it did post-2008. Interest rates are going up – and that reflects not only inflation expectations, but also the credit-worthiness of a government that is assuming even larger deficits.

Readers are well aware of this problem. As one poster and reply on WSJ.com pointed out:

How does the Feds balance sheet play into all this? With the Fed’s ability to print money and then pump it into the economy, we see the inflated price of assets. What impact on stocks will this have when the Fed takes the money back?  Logically, if the prices increased with the expansion, the price would decrease with the contraction.  Furthermore, the Fed took away other investment vehicles people had used. Some invested in stocks out of last resort.  I think President Trump has the economy back on the right track with tax cuts, but I am not sure about the lingering impact of the Keynesian policies employed by the Fed.