How Government Fiscal Policy Would Affect The Market

The government finally announce to reduce taxes and increase spending to create more jobs. It is a good news or the bad one. Most of us would probably think that is a tremendous event to celebrate. But, think twice, there are no free lunch in this world, at least in the world that we come to know.

First of all, we need to see everything in the perspective of economic. The economic is made of constant exchange of resource in the community - the market. The resource we refer to often are in the form of currency - paper money. The paper money now is called the fiat currency, which it is backed by the government which its value is direct affected by the stability of government. The currency flow from person to person, institution to institution, entity to entity to make our market constantly vibrant. The current will die if it does not move, same like the electric current. Therefore spending is a form of exchange which required source of income, method of payment and party to receive. Government primary income is coming from taxes - the source of income. And it normally spend in the form of incentive, taxes exempt, subsidize and government project that provide jobs. When government need funding from new project or subsidize the citizen in the form of tax rebate, they need source of income to support it. They either can tax the private sector or borrow money by selling bonds or by simply printing more money. Since if the government vowed not to increase tax and promise abundance of government spending for benefit of social, the only way to fund such vow is by minting more currency. Well, most of us would think, what is the problem with that? The problem is inflation. Imagine when suddenly paper currency flooded the market, everyone will suddenly have more currency to spend. Yet the supply of goods and services available do not increase at the pace of government is printing the money. The demand is more the supply, therefore price increase phenomena will likely to abrupt. It is exactly what happen during post world war 1 of Weimar Republic in German, 1990s financial crisis that swept across south America like Argentina and Mexico, and 1998 Asia financial epidemic. So, whenever the government is making such promise to win vote, they are in the sense of conspire to steal from your money by dilute the value of dollar that every single person is holding. It does not make any sense if you could have a million dollar but only can buy a bread.