How fiscal policy affects your investment decisions

Brief Introduction

Fiscal policy is an important tool used by the government to regulate the economy, implemented through adjustments in taxation and public spending. For cryptocurrency investors, understanding changes in fiscal policy is crucial as it directly affects market liquidity and asset price trends.

Core Mechanism of Fiscal Policy

The government influences the economy through two main means: changing tax rates and adjusting the scale of public spending. These two tools, when used in conjunction, can achieve the goals of stabilizing prices, reducing unemployment rates, and promoting economic growth.

When fiscal policy adjustments occur, the disposable income of individuals and businesses changes accordingly. This change will ultimately affect their investment capacity in various assets, including digital assets.

Three Main Types of Fiscal Policies

balanced fiscal policy

A policy of maintaining a balance between government revenue and expenditure. This approach is usually used to maintain economic stability and avoid excessive intervention.

Practical Example: In 2019, Germany adhered to the principle of budget balance, ensuring the sustainability of economic operation by maintaining equal revenues and expenditures. Although this conservative approach is stable, its effect on economic stimulus is limited.

Expansionary Fiscal Policy and Discretionary Fiscal Policy

Expansionary policies include tax cuts and increased public spending, aimed at stimulating demand during economic downturns. Discretionary fiscal policy is when the government adjusts taxes and spending flexibly based on real-time economic conditions, rather than automatically following preset rules.

When the government decides to cut taxes, the available funds in residents' hands increase. They may choose to spend, purchase real estate, or invest in financial assets. In the cryptocurrency sector, this increase in liquidity often leads to a rise in asset demand.

2008 Financial Crisis Case: The U.S. government responded through tax cuts and increased spending. Tax reductions allowed households to retain more income, thereby boosting consumption. As businesses faced a rebound in demand, they began to expand hiring, creating a virtuous cycle.

contractionary fiscal policy

Increase taxes and reduce public spending to control price rises during an overheated economy. This policy will reduce market liquidity and decrease the investment funds available to investors.

Early 1980s American Practice: To combat high inflation, the government raised tax rates and cut spending. Although prices were eventually controlled, it also led to a rise in unemployment in the short term.

The Actual Impact of Fiscal Policy on the Crypto Market

The role of expansionary policies ###

When the government injects funds to stimulate the economy, the allocation of risky assets in the entire market tends to increase. Investors holding more cash are more likely to seek high-yield opportunities, including purchasing cryptocurrencies such as Bitcoin and Ethereum.

This phenomenon was particularly evident during the COVID-19 pandemic. Relief programs from multiple governments provided subsidies to residents, and some of the funds flowed into the digital asset market, driving up cryptocurrency prices.

The Role of Contractionary Policies

On the contrary, when the government raises taxes, the funds available for investment shrink. Investors face a situation of reduced disposable income, which leads to a decrease in demand for high-risk assets. This often puts pressure on cryptocurrency prices.

Economic Benefits Brought by Fiscal Policy

Economic Stability

By using an appropriate combination of policy tools, the government can maintain a balance between economic prosperity and recession. This provides market participants with a more predictable environment.

Infrastructure Investment

Increasing public expenditure can improve infrastructure such as transportation and communication. For example, China's large-scale investment in infrastructure has enhanced economic vitality and international trade capacity.

Coverage of Public Services

Through a progressive tax system, the government can provide basic services such as healthcare and education for low-income groups. For example, Sweden provides free healthcare and education for all through higher progressive tax rates, enhancing overall social welfare.

Conclusion

Fiscal policy influences the performance of the cryptocurrency market indirectly but powerfully by regulating the flow of funds in the economy. Whether through flexible adjustments of discretionary fiscal policies or the automatic execution of preset rules, every policy change can serve as a signal that investors need to pay attention to. Understanding these relationships is crucial for making informed investment decisions.