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The financial markets get a taste of cold turkey

Traders watching the markets on the floor of the New York Stock Exchange today Photo: Reuters/Brendan McDermid

Giving anything up if you want it and rely on it is hard. It can take time, and sometimes things get worse before they get better. Is that what is starting to happen on the financial markets after dramatic falls today?

For years now since the financial crisis the world's big central banks have been pumping money, metaphorically at least, into the economy.

Here it's called quantitative easing, and it was conceived as an emergency measure.

It is mostly agreed that back at that time of the crisis the decision to magic hundreds of billions out of thin air was the right one. But now it has been in place for years, many experts believe it has created problems of its own.

The Bank of England has a quantitative easing programme. Credit: Press Association.

A couple of weeks ago the chief executive of one of our biggest financial companies described QE to me as 'monetary methadone', a method of feeding our habit without confronting the real issues.

He suggested recent highs in financial markets were dependent on the money pump still flowing, and that the fundamental problems of our economies are a long way from being sorted out. He wondered if when that 'methadone' was withdrawn the results could be disaster.

There has been uncertainty in the financial markets. Credit: Reuters

Today that theory appears to have been borne out.

After a hint from the boss of the Federal Reserve, America's Central Bank that QE might soon come to an end, the markets took fright, dropping right around the world, traders' computer screens covered with red lines.

The falls were significant, the most dramatic on the FTSE for example since September 2011.

Why? If QE comes to an end, it isn't just the end of that enormous supply, it brings forward the day when interest rates are finally raised from rock bottom. When that happens that means the cost of borrowing will go up. Whether for householders paying the mortgage, firms paying off debts, banks or governments shelling out interest on the deficit, it means costs will go up, potentially very quickly and significantly. It may be a rather technical argument, but when interest rates eventually go up, and they will have to eventually, many other costs go up too.

After years of artificial stimulant the markets today were given a taste of cold turkey - the scale of the drops suggest they didn't like it one little bit.

Here is what happened on the various different exchanges:

  • FTSE 100 in London: -3pc
  • CAC 40 in Paris: -3.2pc
  • DAX 30 in Frankfurt: -3.15pc
  • FTSE Mib in Milan: -3pc
  • IBEX 35 in Madrid: -3.4pc
  • Dow Jones in New York: -1.4pc
  • S&P 500 in New York: -1.6pc