Stellar Capital Management

In the ensuing days and weeks there will be plenty of opinions about what passed and what will continue to be negotiated in the drama known as the fiscal cliff. The spectacle of across-aisle dealings makes for a well rated "Reality" show (Fiscal Riff?), but poor ratings for both effectiveness and efficiency in governance. With US-centric issues in the forefront, the focus has been taken off the ongoing Euro Zone talks, which continue to plod along.

After more than 30 years of declining rates, a reversal that started a longer term trend of higher interest rates, like that experienced from the late 50s to early 80s could be devastating to bond investors. In addition, interest rate increases have not treated many other income investments like fixed rate preferred stocks very well as many of these issues have extremely long maturities, and/or are perpetual. This makes stretching for yield in this type of environment both challenging and hazardous.

Many people get lost when economists start talking about monetary and fiscal policy. By definition, fiscal policy is the use of government expenditure and revenue collection to influence the economy through borrowing, spending and taxation. Monetary policy is the process by which the monetary authority of a country (the Federal Reserve, or ?Fed?, in the U.S.) controls the money supply in that economy through targeting interest rates or buying and selling securities from its portfolio. In the end, the two policies are just two different tools used to manage an economy.