Having looked at how it is that both monetary and fiscal policies have an individual ability to control the supply of money within an economy, and therefore the short term demand of the markets themselves, we can now look at how the individual combinations of these two policies can impact the economy as a whole in terms of interest rates, currency values, demand, and private business growth.
Expansionary Fiscal and Monetary Policies
By implementing both an expansionary monetary and fiscal monetary policy, the government is taking all measures available to increase the market’s access to money. This is accomplished by both directly stimulating the market, and improving the ability of institutions to lend. The results of this sort of strategy will be that interest rates will generally lower due to the ease of lending, while demand will increase, and private business will expand to meet that demand. From there, currency values will generally increase as foreign investors pay to invest in the growing market, and for the right to borrow the new funds. Continue reading
Fiscal policy represents the government’s ability to influence the economy through taxation and spending. By using tools known as ‘automatic stabilizers’, the government is able to control the fluctuations in the economy, and ensure that the business cycles therein are stabilized. The objective of these policies is to then both influence the application of funds that are directly minted in an expansionary monetary policy, and to ensure that government incomes are balanced with appropriate outflows.
In general, the goals of fiscal policies surround the stimulation of demand through either encouraging or discouraging demand. This is accomplished by examining the impacts of certain measures in light of a figure known as the market’s marginal propensity of consume. The MPC measures the market’s willingness to spend each new dollar they earn from a fiscal policy. Continue reading
Monetary Policies represent the actions taken by a central bank to control the supply of money and credit available in an economy. Since the supply of money and credit available to an economy will dictate the way in which the markets within will behave, it is important for a personal investor to understand how it is that the economy will react to different monetary policies, and how it is that they combine with the other aspects of the market as a whole. Once we have that understanding, we can start to look ahead at how it is that government involvement in the markets will have an impact on our personal portfolios.
Monetary policy can be considered to be expansionary, neutral, or Contractionary. An expansionary monetary policy refers to a strategy of increasing the money supply available to markets through either increased access to credit, or direct inflation. A Contractionary policy is the exact opposite of an expansionary policy, in that it aims to slow down the growth of the economy. Lastly, a neutral policy aims to maintain a constant rate of growth in the money supply in the interests of maintaining predictability. Continue reading
As we progress through the different ways in which we can use technical indicators to improve our understanding of stock price movements, you might start to notice how it is that the indicators become increasingly subjective. This is because of the way in which all of these formulas are simply tools for evaluating the overall trends, as opposed to absolute laws of the market. It is therefore only through contextual interpretation that we can come up with a reasonable conclusion about how it is that a technical indicator might show us an opportunity. Otherwise, we might find ourselves buying into a false trend that doesn’t really make sense.
Looking at the historical success rate of swing trading strategies that rely entirely on the use of technical indicators on their own, there is a fairly uncertain picture of the outcomes. Over the short term, testing a strategy that relies on the Bollinger Bands or Stochastic Oscillators to exclusively trade the position in accordance to what the indicator would define as a trend will generally create only a few opportunities, with a general tendency towards taking a slight loss on the position. However, over time, back-tested portfolios can show as some highly favorable yearly returns. Continue reading