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The Daily Reckoning

The day QE2 ended

Quantitative easing ended on July 1, and so far, the stock market is doing just fine

By Guest blogger / July 5, 2011

A woman photographs a fireworks show over the Delaware River for the Fourth of July holiday Saturday, July 2, 2011, in Trenton, N.J. If there's one things Americans had to celebrate this Independence Day, it was the end of the second phase of quantitative easing, writes guest blogger Bill Bonner.

Mel Evans / AP

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Americans had something to celebrate this Independence Day. QE2 – the Feds’ $600 billion money-printing program – ended on Friday. And guess what? The world didn’t end with it.

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Instead, the stock market gave a loud ‘yahoo!’ The Dow rose 168 points. If QE2 is going to be the death of the US economy, the stock market doesn’t see it.

Not that stock market investors always have 20/20 vision. These were the same people who were buying Lehman Bros. and mortgage lenders stock just before the company collapsed.

So, we’re not saying that today’s prices will necessarily be the same as tomorrow’s. The market may know the price of everything at every moment. But it doesn’t know the value. So, as it discovers value, it changes its mind about the price.

Still, we find it mildly disturbing that the Fed can cut off a $100 million-a-month buying program without upsetting investors’ sangfroid. It doesn’t make us wonder about the Fed…but about investors. What’s wrong with them?

But since it was a national holiday, we decided not to worry about it.

Instead, we’d spared a little pity for the US Senate. The poor senators decided to stay in session this 4th of July. They thought it was important to pretend to solve the US debt crisis.

As you know, from the day of its founding – that is, July 4th, 1776 – to the present day, the feds have run up approximately $14.3 trillion of official national debt. And since Congress has only authorized $14.3 trillion of debt, they’re running into a problem. Either they pass a new law, raising the debt ceiling. Or they cut spending so they don’t have to borrow more money. Or, they treat the debt ceiling law like the US constitution, and simply ignore it.

We know which choice we would make. But nobody asked our opinion, so we’ll keep it to ourselves.

The debt ceiling is distraction. It’s just an American nuance to a genuine problem that is plaguing all the mature democratic/capitalistic economies. Greece, Britain, Ireland…dozens of other countries…and the US.

As regular readers of this Daily Reckoning know, It is a problem with the funding of the modern social welfare state…and the ‘social contract’ itself. The bargain is this:

The people give up 20% to 50% of their output…and sometimes, their lives…to their government.