How Governments Influence Markets

In the 1920s, very few people would have identified the government as the major player in the markets. Today, very few people would doubt that statement. In this article, we will look at how the government affects the markets and influences business in ways that often have unexpected consequences.

Monetary Policy: The Printing Press

Of all the weapons in the government's arsenal, monetary policy is by far the most powerful. Unfortunately, it is also the most imprecise. True, the government can do some fine control with tax policy to move capital between investments by granting favorable tax status (municipal government bonds have benefited from this). On the whole, however, governments tend to go for large, sweeping changes by altering the monetary landscape. (For more, see: How The U.S. Government Formulates Monetary Policy.)

Currency Inflation

Governments are the only entities that can legally create their respective currencies. When they can get away with it, governments always want to inflate the currency. Why? Because it provides a short-term economic boost as companies charge more for their products; it also reduces the value of the government bonds issued in the inflated currency and owned by investors

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