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After today’s $63b ASX plunge, should we be worried about the stock market?

We may be seeing the beginning of the end of one of the greatest financial stories ever told.

The story began with an over-inflated US housing market in the 2000s. The first major twist came when Wall Street decided to exploit this extremely overvalued market by creating imaginative financial products connected with it.

The next major chapter involved a complete freezing of all global financial markets as trillions in worthless assets were uncovered and, at its core, those making big financial transactions lost trust in one another.

The final chapter has lasted over a decade.

The policy response was to flood global markets with trillions in cheap money. Banks were encouraged to lend to businesses and businesses were encouraged to invest and hire.

It worked to a degree, but too much cheap money also made its way into asset markets — including stock markets.

The final few pages of the story may be playing out before us now, with today’s $63 billion plunge on the ASX another small twist in a global plot. I’ll explain.

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Inflation rises to 3.5 per cent, the biggest jump since 2014

A sign the system isn’t coping

In financial markets, sustained rising inflation is one sign the system isn’t coping with the stimulus on offer.

This is especially true in the United States, where a growing economy, huge amounts of fiscal and monetary stimulus, higher wages and cost-push inflation from pandemic supply constraints have led the Federal Reserve (our equivalent of the Reserve Bank) with little choice but to attempt to rein in inflation by raising interest rates.

Read More: After today’s $63b ASX plunge, should we be worried about the stock market?

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