In our last lesson we looked at the private sector and government regulation components of the economy and how each of these relates to trading. In today’s lesson we are going to look at the second way that government plays a role in the economy which is through something known as Fiscal Policy.
Fiscal policy can be defined for our purposes very simply as anything relating to government spending and taxation. Before looking at the fiscal policy role of government in trying to influence the economy, one must first have an understanding of the business cycle. For a number of reasons which are widely debated, the economy goes through repeated periods of growth and contraction over time which can be broken down into the following phases.
1. Contraction where economic activity and growth slows and can turn negative
2. Trough where the economy stops contracting and a new expansion begins
3. Expansion or the speeding up of economic growth.
4. Peak where the growth of the economy maxes out and begins to turn downward
We could spend many months going over and debating why this is but for our purposes it is simply important to understand that, while the timing and length of each of these phases has varied widely, the above pattern repeats itself over and over again throughout history. This is important for us as traders to understand as different phases of the business cycle and changes in peoples forecasts of where the economy is in those cycles is arguably the greatest factor which effects the price level of every market.
Prior to the great depression the US Government had a pretty hands off approach in regards to the business cycle. Since the great depression however the government has played a much more active role in the economy with its stated goals being to act to facilitate full employment and price stability. To help understand these goals and the balancing act that goes on between them as they often conflict, lets look at how each relates to the different phases of the business cycle.
1. During an expansion we start to see more people employed as companies begin to sell more goods and services and need to hire more people to keep up with the demand. As economic growth picks up and more people are employed there are more people spending their paychecks which can cause prices to rise, something also known as inflation. Because of this effect on prices the government’s primary concern here will normally be trying to keep prices stable and inflation in check without hurting economic growth. The two things they can do in regards to Fiscal Policy to try and keep prices in check and inflation at bay are:
a. Raise Taxes: By raising taxes money is taken away from the consumer who now has less money to spend helping to counteract the demand that is pushing prices up and causing inflation.
b. Reduce Government Spending: If the government does not spend as much on projects such as roads and things such as education then this takes some of the demand which is working to drive prices up and causing inflation out of the picture as well.
This is important from a trading standpoint as while an increase in taxes or a reduction in government spending can help fight inflation it can also be seen as negative for the financial markets as demand is being taken out of the equation.
2.During a peak we start to see employment and the amount of goods and services produced and sold by companies begin to level off. At this stage the government normally becomes more concerned with preventing a deep contraction which is known as a recession, or severe contraction which is known as a depression. The two tools which they have in their fiscal policy to work with here are:
a. Reduce Taxes: By reducing taxes the government effectively puts money in the consumer's pocket allowing them to spend more money and drive economic growth. This is what we are seeing now with the economic stimulus package which was recently passed and is giving tax rebate checks out directly to the consumer.
b. Raise Government Spending: If the government spends more on projects such as roads and on things such as education then this increases demand in general which helps drive economic growth.
3. During a contraction we start to see employment and the amount of goods and services produced and sold by companies start to fall. The fiscal policy tools that the government has at their disposal here are the two mentioned above. Although there are exceptions normally during this stage inflation is not a concern as demand is falling so the government can be more aggressive than they can during a peak.
A second factor which can become a concern here is deflation, where a lack of demand actually causes prices to fall. This, according to Wikipedia can be a large problem which "sets off a deflationary spiral where businesses slow or stop investing, because the investment risk is perceived as higher than just letting the money appreciate due to deflation."
Lastly and potentially even more potent of a problem which can occur during a contraction is stagflation which is a period of slow or negative growth which is accompanied by inflation. When this happens you can see how policy makers hands are somewhat tied because they are getting hit from both sides so to speak.
4. During a trough we start to see the employment level and level of goods and services produced and sold by companies start to level off again. During this phase the expected action if any from the fiscal policy side would be to begin to reduce whatever policies had been put into place to help the economy grow as it moves into another expansionary cycle.
While many believe that Fiscal policy has shown to be an effective tool in regulating the business cycle, as government spending and taxation must be approved by both Congress and the President, managing the economy through the use of fiscal policy is normally seen as a lot more tedious than the second tool that government has at their disposal which is known as Monetary Policy.
This will be our topic of discussion in tomorrow’s lesson so we hope to see you then. For those of you who wish to learn more about Fiscal Policy, the business cycle, the different schools of economic thought on the subject, as well as things such as inflation and deflation I have included a link to additional resources in the description section of the site if you are watching this video on Youtube or just below the video if you are watching it on informed trades.com
Elevate Your Trading With The Amazing Trader!
The Amazing Trader includes:
Actionable trading levels delivered to YOUR charts in real-time.
Mon 26 Feb 2018 A 15:00 US- New Homes Sales Tue 27 Feb 2018 A 08:55 DE- Jobless B 13:30 US- Durable Goods A 15:00 US- CB Consumer Confidence A 15:00 US- Pending Homes Sales AA 15:00 US- Powell House Testimony Wed 28 Feb 2018 A 10:00 EZ- flash HICP AA 13:30 US- GDP A 15:30 US- EIA Crude Thu 1 Mar 2018 A All Day final Mfg PMIs A 13:30 US- Weekly Jobless AA 13:30 US- Core PCE Deflator AA 15:00 US- Powell Senate Testimony A 15:30 US- EIA Crude Fri 2 Mar 2018 AA 15:00 US- final Univ of Mich
John M. Bland, MBA co-founding Partner, Global-View.com
Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.
looking for your first broker or do you need of a new one? There are
more critical things to consider than you might have thought.
We were trading long before there were online brokers. Global-View
has been directly involved with the industry since its infancy. We've
seen everything and are up-to-data with recent regulatory changes.
The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.
The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.
Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by Global-View.com.
The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.
Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.
Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.
Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.