by Artis Shepherd
Mises.org
Capital markets, monetary policy, fiscal policy. The extent to which these three factors intertwine is of no small consequence to the American economy.
On one hand, loose monetary policy generally enables the politically-desired fiscal policy—big deficit spending—by lowering the cost at which governments borrow. Loose money also enables rising asset prices through compression of cap rates—a shorthand valuation method wherein discount rates to future cash flows (which are themselves subject to increasingly fantastical projections as interest rates decline) are lowered, thus increasing present value.
In turn, rising asset prices provide political cover by creating a wealth illusion—a politically useful context in which high asset values belie weak fundamental performance in the main street economy. Thus, governments receive less pushback on price inflation and profligate government spending while Americans are distracted by increasing brokerage account balances.