Different Ways the Government can Influence the Market
There is no doubt that it the current background of the financial markets, the government is one of the most influential entities. And there are many ways that a government can affect the market. Here are some.
Among all the tools that the government has, monetary policy is considered to be the most influential and powerful. On the other hand, it is at best imprecise. While the government can do some sort of control with tax policy to transfer capital between investments by providing favorable tax status, governments usually go for large, sweeping changes by altering the monetary landscape.
Governments are by far the only entity that can legally make their respective currencies. If they can, they usually want to inflate such currencies.
That’s because it offers a short-term economic boost as companies change more for their products. On top of that, inflating the currency also means reducing the value of the government bonds that have been issued denominated in the currency and owned by investors.
While the inflation of currency may look appealing In the beginning, particularly for investors who want corporate profits and share prices rising up, the long term impact of currency inflation is the lowering of value across the board.
Fiscal Policy and Interest Rates
Interest rates are also another popular weapon even if they are almost always used to counter inflation. This is because they can usually spur the economy separately from inflation.
Lowering interest rates via the Federal Reserve pushes companies and individuals to borrow more and buy more. Unfortunately sometimes, this results to market bubbles in which huge amounts of capital will be destroyed.
Government bailout can disrupt the market by changing the rules enable poorly run companies survive. Usually, these bailouts can damage the shareholders of the rescued company as well as the company’s lenders.
Under normal market conditions, these firms would go belly up and see their asset sold to more efficient firms to pay off creditors and sometimes even shareholders.
On the other hand, the government only uses such capability to protect the most systematically important industries like banks, insurers, airlines, and car manufacturers.
Subsidies and Tariffs
For the taxpayer, it may be difficult to differentiate subsidies from tariffs. Nonetheless, a subsidy refers to the government taxes that the general public pays. The government then gives that money to a chosen industry to make that industry more profitable.
Meanwhile, for tariffs, the government applies taxes to foreign products to make them more expensive, letting the domestic suppliers to charge more for their product. Both of these actions have a direct effect on the market.
The government’s support of an industry is a powerful incentive for banks and other financial institutions to give those industries favorable terms. This preferential treatment from government and financing means more capital and resources will be poured in that industry, even if the only comparative advantage it has is government support.
Regulations and Corporate Tax
Businessmen rarely complain about bailouts and preferential treatments. On the other hand, they cry painfully when it comes to regulations and tax.
High taxes of corporate profits have different effects in that they discourage companies from coming into the country. States with low taxes can attract companies better than their neighbors, and this is true for countries that tax less.