Location! Location, Location! is something that is said in real estate but is also something that affects every business. Any strategic manager or investor understands that the fiscal policy of the geographical area is an important aspect to deciding where to set up their headquarters. It isn’t a coincidence that there are more cooperations in Delaware than citizens due to a tax loophole. It is important as investors and traders to understand the mindset of top CEO’s and leaders because changes in fiscal policy can be a threat to a business current strategy.
Macroeconomic Fiscal Policy
Federal Bank Influence
If you have been a trader or investor, you understand the most powerful woman in the United States is Fed Chairman Janet Yellen. The reason why she has so much power is because she holds the tools to change the United States economy. The Federal Reserve controls interest rates to control the business cycle. During the business cycle, there are peaks and troughs. The fed chairman has been using interest rates to encourage or discourage consumer buying and investing.
Raising interest Rates
There are times when the economy is growing too fast and the fed will increase interest rates. During times of extreme growth, some countries don’t have the supply of workers to meet the labor needs. What happens is there becomes a bidding war for employees under these circumstances. Another thing that happens is stock market bubbles start to form. The fed has used their power to stop people from bidding up equities higher and creating a bubble. Some of the reason the market crashed in 1987 was a market bubble and the fed raising interest rates. This scared investors out of equities which sparked a market sell-off due to the fear on Wall Street.
Lowering Interest Rate
In other circumstances, the fed wants to make the economy stronger. In theory, they do this by lowering interest rates to near zero. When the economy is doing poorly, the fed wants money to flow into investments and make buying items cheap. To illustrate, after the crash of 2008, you could borrow money at 3% which is almost like paying no interest. The goal of this is to get investors into equities and to get consumers to purchase more items. This gives consumers more incentive to purchase durable goods. Two examples would be vehicles or real estate.
Taxes on Businesses
One of the things that over taxation on cooperate business can do is cut their workforce or cause them to leave a country completely. If you are a for-profit business there are many things that can affect your decisions. In some cases, tax burdens can shrink work forces and in other situations this can make a company leave to another country.
Every macroeconomic environment has regulations that aren’t directly financially related but can impact business. As an example, the store Ikea has got bad plasticity over a number of raw materials (wood) that they use which is environmentally unfriendly. As a hypothetical, if Ikia couldn’t get their raw materials for production from a country that is green they would just move to another location.
The most important thing when it comes to fiscal policy in the United States is the fear of change.What every trader is looking for is consistency and the fear of major policy changes disrupts the market. Many times traders just sit out the volatility and stop trading because what a trader wants is a magic crystal ball that tells them what the markets are going to do. Going back to the Fed, a major change in interest rates can create fear in the market and create a sell-off. There are other examples that will make money poor into sectors. The idea of a legal marijuana business has made money poor into companies that produce cabanas.