In the last article we summarized exactly how Monetary and Fiscal policies combine to create overarching government strategies for controlling inflation, interest rates, and influencing private business and demand. This means that these strategies will actually have a direct bearing on the profitability of investments in that given economy, as well as its employment levels. Because of the significance of such policies, we need to be able to understand how it is that we can adjust our personal portfolios and employment schedule to benefit the most from different policies.
Looking at an expansionary environment, regardless of fiscal policy, the key point to remember is that the government is explicitly trying to bolster the economy by lowering interest rates, diluting the money supply with inflation. Their objective is to increase demand, private business, and therefore employment levels. Assuming there is credibility and predictability to the effort itself, there is a strong chance that foreign investors will also enter the currency region, and bolster the value of both the currency and the country’s associated investments. This means that an expansionary monetary policy is extremely conducive to borrowing, because of the cheap interest rates, and the fact that inflation will dilute out the value of the debt over time. From there, the environment is also conducive to investment, because of the way in which the government is stimulating private business and demand.
When making investment decisions in an expansionary monetary environment, it is important to understand the trade-off between growth stemming from capital and labor investments. Specifically, because of the way in which inflation will degrade local wages, while creating value for capital investments because of the way in which their price is discounted less over time by the lower interest rates (as well as their intrinsic ability to hold real value), there is an opportunity to invest in companies that are in a position to transition their competitive advantage from a labor-based to a capital-based one.
Essentially, those companies with a great deal of workers can use the savings that they earn against wages, which traditionally take a while to increased to reflect inflationary pressures, to invest in capital capacity that will either improve the productivity of their existing work force, or reduce the company’s dependence on its work-force to the point at which it no longer requires such a high level of staffing. The result is that these companies can reduce their variable costs, and create a greater ability to scale. Combined with the stimulated demand of the greater economy, the company will theoretically be able to create a greater return in comparison to a company that does not have a similar advantage.
Finally, a personal investor in an expansionary environment needs to remember that their own personal wages will be diluted by the inflation. As such, these times are very conducive to making fixed investments into personal skill-sets so as to improve the future value of employment. Be it through specific training, or working on independent projects that will build up competencies, an individual can take advantage of the inflation to greatly improve their income in the future.