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. Continue reading