The government’s influence on the market

In the 1920s, few people would think that the government was This Major players in the market. Today, few people would doubt this statement. In this article, we will examine how governments influence markets and businesses in ways that usually have unintended consequences.

Key points

  • The government has the ability to make extensive changes to monetary and fiscal policies, including raising or lowering interest rates, which has a huge impact on business.
  • They can boost the currency, thereby temporarily boosting corporate profits and stock prices, but ultimately lower the value and push up interest rates.
  • When a company or an entire economic sector fails or is likely to destroy the entire economic system, the government can intervene by providing assistance.
  • The government can create subsidies, levy taxes on the public and provide money to an industry, or impose tariffs on foreign products to increase prices and make domestic products more attractive.
  • Higher taxes, fees, and stricter regulations may hinder companies or entire industries.

Monetary Policy: Printing Press

Of all the weapons in the government arsenal, monetary policy is by far the strongest. Unfortunately, it is also the least accurate. Indeed, the government can exercise some fine-grained control through taxation policies and transfer capital between investments by granting preferential tax status (municipal government bonds have already benefited from it). However, in general, the government tends to carry out large-scale and thorough changes by changing the currency structure.

Currency inflation

The government is the only entity that can legally create their own currencies. When they can escape by chance, the government always wants to inflate the currency. why? Because as the company charges more for its products, it provides short-term economic growth; it also reduces the value of government bonds issued in inflated currencies and owned by investors.

Inflated currencies feel good for a while, especially for investors who see corporate profits and stock prices soar, but the long-term effect is an overall decline in value. Savings are worthless, punishing savers and bond buyers. This is good news for debtors, because they now have to pay less value to repay their debts-which again hurts those who buy bank bonds based on these debts. This makes borrowing more attractive, but interest rates will soon soar to eliminate this attraction.

The government can supervise everything from monetary policy to currency prices to the rules and regulations that affect each industry, so it has a major and far-reaching impact on the market.

Fiscal policy: interest rate

Interest rates are another popular weapon, although they are often used to offset inflation. This is because they can stimulate the economy separately from inflation. Lowering interest rates through the Federal Reserve—rather than raising them—encourage companies and individuals to borrow and buy more. Unfortunately, this can lead to asset bubbles. Unlike the gradual erosion of inflation, a large amount of capital is destroyed, which allows us to cleverly enter the next way the government influences the market.


After the 2008-2010 financial crisis, it is no secret that the US government is willing to help the troubled industries. This fact was known even before the crisis. The savings and loan crisis of 1989 It is very similar to the bank rescue in 2008, but the government even has a history of rescuing non-financial companies such as Chrysler (1980). Pennsylvania Central Railroad (1970) , And Lockheed (1971). Unlike direct investment under the Troubled Asset Relief Program (TARP), These bailouts come in the form of loan guarantees.

Bailouts can distort the market by changing the rules and allow poorly managed companies to survive. Usually, these bailouts hurt the shareholders of the bailed company or the company’s lenders. Under normal market conditions, these companies would go bankrupt and see their assets sold to more efficient companies to pay creditors and, if possible, shareholders. Fortunately, the government only uses its ability to protect the most systemically important industries, such as banks, insurance companies, airlines, and automakers.

Subsidies and tariffs

From the perspective of taxpayers, subsidies and tariffs are essentially the same thing. In the case of subsidies, the government levies taxes on the public and provides funds to selected industries to make them more profitable. In the case of tariffs, the government imposes taxes on foreign products, making them more expensive, allowing domestic suppliers to charge higher fees for their products. Both of these measures will have a direct impact on the market.

The government’s support for an industry is a powerful motivation for banks and other financial institutions to provide preferential conditions to these industries. This preferential treatment of government and financing means that more funds and resources will be invested in the industry, even if its only comparative advantage is government support. This loss of resources affects other more globally competitive industries, which must now work harder to obtain capital. When the government is a major customer in certain industries, this effect will be more pronounced, leading to well-known examples of contractor overcharging and long-term project delays.

Regulations and corporate tax

The business community rarely complains about the rescue of certain industries. This may be because they know that their industries may also need help someday. But in terms of regulations and taxes, Wall Street does oppose it. This is because although subsidies and tariffs can give an industry a comparative advantage, regulations and taxes can have a negative impact on profits.

Lee Iacocca served as chief executive officer of Chrysler’s initial rescue plan. In his book, Iacocca: AutobiographyHe pointed out that the higher cost of ever-increasing safety regulations is one of the main reasons Chrysler needs rescue. This trend can be seen in other industries. As regulations increased, some smaller suppliers were squeezed out of the economies of scale enjoyed by larger companies. The result may be a highly regulated industry in which several large companies are bound to be intertwined with the government.

High taxes on company profits can have different effects because they may prevent companies from entering the country. Just as states with low taxes can attract companies from neighboring countries, countries with lower taxes tend to attract any mobile company. To make matters worse, companies that cannot relocate will eventually pay higher taxes and are at a competitive disadvantage in terms of business and attracting investor capital.

Bottom line

The government plays an important role in the financial sector. Regulations, subsidies and taxes can have a direct and lasting impact on companies and the entire industry. For this reason, Fisher, Price, and other well-known investors consider legislative risk as a factor worth noting when evaluating stocks. If a great investment may face the risk of competitive advantage and reduced profits due to certain government actions, then it may not be so good.


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