We’ve been discussing many of the main issues related to our economy, but how do politics and central banks impact FX markets? These are often just not thought about during these discussions. However, a careful examination will help determine if there is a big impact on today’s economy. If you’ve noticed a difference, be sure to let us know!
There are two ways central bank’s impact FX markets. Either they create artificially low interest rates that make it profitable for banks to lend or, alternatively, they print money to finance governments.
If you’ve seen higher interest rates in the past, then you know that banks are taking on high cost loans in order to compete with other lending institutions. This has created more competition, thus lowering overall interest rates.
Since central banks are in the business of keeping inflation down, they are purposely creating the wrong kind of conditions. In other words, the type of conditions that cause economic growth and job creation!
When the majority of banks started competing for business, lending rates were driven up in an effort to hold the interest rate down and keep the loan business on their balance sheets. The result was high-cost loans that forced borrowers to pay higher interest rates than before.
Instead of creating interest rates that encourage lenders to lend to small businesses, central banks have created low interest rates that encourage banks to fund government projects. Government credit programs have seen a spike in demand, since they are backed by the Fed, which has caused government debt to rise in recent years.
Having a large amount of political contributions from central banks and the ruling classes could be one explanation as to why the federal government has done such a poor job of keeping their stimulus plan on track. In addition, it would explain why many governors have been slashing funds allocated to vital state projects. As the political class takes advantage of the artificially low interest rates, state and local governments may find that their budgets are stretched to the limit and may have to close some projects due to financial problems.
Now that we’ve established how do politics and central banks impact the economy, let’s examine how it affects the forex market. Just as interest rates affect the mortgage market, the economy, and people who wish to get mortgages, interest rates also influence how much money can be lent. The central bank’s impact can be seen by looking at mortgage rates, mortgage interest rates, and how much people pay in total interest.
Any time political contributions have created a problem in government, the public has been the target. No matter how important the functions of the government are, the government’s bad decision making has created a situation where the government does a poor job of managing its own policies.
As government policies go out of control, the public will become even more angry at the central banks. Central banks and politicians will continue to think outside the box for policy changes and then implement their own whims.
As inflation becomes a major issue, the Fed will keep manipulating the economy with policy changes that attempt to raise prices. The end result will be higher prices and higher unemployment in the end.
Now that you know how to do politics and central banks impact the economy, we invite you to visit our website and check out our information on the economy. Visit our blog to learn more about this topic.