If Trump gets his way, expect a 'perfect dollar storm' to rip through global markets

Discussion in 'Economics' started by themickey, Sep 7, 2017.

  1. themickey



    Donald Trump's appetite is whetted. He knows that American companies have stashed trillions of dollars overseas in the greatest cash reserve in the world.

    Apple has $US257 billion ($333 billion) parked abroad beyond the reach of the US tax office, the Internal Revenue Service. Google's parent company Alphabet has $US126 billlion, Microsoft $US84 billion and Cisco $US68 billion. The US Bureau of Economic Analysis estimates that total retained earnings outside the country have mushroomed to $US4 trillion.

    The president is determined to lay his hands on this money, or at least to divert it back into the US economy. The latest briefings from Washington suggest that the White House is preparing "mandatory" action as part of his tax reform, unlike the previous voluntary attempts to lure back money through tax holidays.

    If Trump succeeds, these repatriated capital flows will have a volcanic impact on the US dollar, Wall Street, and the global financial system, with big winners and big losers

    Companies leave the money abroad because the US corporate tax rate is the world's highest at 35 per cent. Their overseas subsidiaries pay (lower) taxes in host countries - very low for Apple in Ireland. The residual US liability is triggered only if profits are sent home.

    John Shin, from Bank of America, says a big chunk of this cash is in other currencies. The funds would have to be converted on the exchange markets. When this happened after the "tax holiday" in 2005 it caused the US dollar index (DXY) to rocket by 15 per cent over 12 months, reversing the secular dollar slide of the era. This time the sums are much larger.

    The Congressional Research Service thinks just 46 per cent of the money held abroad is in US-denominated assets. Technology giants hold more in greenbacks but the implication is clear: there may be a stampede into the US currency, whatever Trump says about the virtues of a weak dollar. He would be overwhelmed by his own policy. Whispers of a trillion-dollar conversion are doing the rounds.

    Shin's survey of 300 firms found that most have no plans to invest repatriated funds in the real economy - as Trump hopes - but rather for "paying down debt" (65 per cent), "share repurchases" (46 per cent), or company "mergers and acquisitions" (42 per cent).

    This is worth a thought. A $US4 trillion flood would cause US corporate debt issuance to dry up and would - ceteris paribus - send Wall Street equities into a parabolic rally akin to the dotcom blow-off in 1999.

    Normally one might wish to batten down the hatches at the current late stage of the economic cycle, but the politics of Trump make the denouement of this cycle wildly binary.

    It would be crueller for those on the wrong side of the global dollar trade. David Bloom, from HSBC, says that repatriation could have seismic effects even if it is already in US currency abroad. Shifting it would drain dollar liquidity from offshore markets, tightening the supply of corporate credit in Asia or Latin America.

    This could happen just as the US Federal Reserve pulls the trigger on "quantitative tightening" and starts to unwind its $US4.4 trillion balance sheet, draining yet further dollar liquidity.

    There may be a stampede into the US currency, whatever Trump says about the virtues of a weak dollar. He would be overwhelmed by his own policy. Whispers of a trillion-dollar conversion are doing the rounds.

    We have the potential for a perfect dollar storm - a massive hurricane in the exchange markets - ripping through a global financial system that has never been more leveraged to the US dollar.

    Yet currency analysts and hedge funds are mostly positioned for the exact opposite. They have written off meaningful action from the White House on tax reform this year, betting on a slow, relentless slide in the "Trump dollar". Nomura expects the euro....

    More on the web link from top of page...
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  2. comagnum


    "The notion that changing taxes is going to lead to a growth spurt is pure nonsense.”

    The whole notion of earnings trapped offshore is misleading, Steven M. Rosenthal, a tax lawyer and senior fellow at the Urban-Brookings Tax Policy Center. “The earnings are not ‘trapped,’” he said. “They’re not offshore. They’re not even earnings. They’re accounting gimmicks that allow earnings to be shifted abroad.”

    What’s more, companies already get something akin to tax-free repatriation by borrowing against those funds, with the added bonus of being able to deduct the interest paid on those loans from their tax bill.

    A shortage of cash does not seem to be what is holding back companies from expanding. Corporate profits are higher as a share of the nation’s gross domestic product now than they have been in decades, said Kimberly A. Clausing, an economist at Reed College who studies the taxation of multinationals. According to a study by Treasury Department economists, “excess” or above-average profits by a few global giants have increased.

    “It’s not clear that giving them an even higher share of profits, or a windfall, is going to lead to extra investment,” she said.

    If taxing foreign earnings that have already accumulated overseas is difficult, so is eliminating incentives that reward companies for continuing to keep profits in tax havens. To that end, Mr. Trump and the Republican leadership have pushed to slash the corporate tax rate and switch to what is known as a territorial system that would tax only profits earned in the United States and not those earned in other countries.

    Mihir Desai, an economist at Harvard Business School, likes that approach. “We currently have the worst of all worlds,” he wrote in an email. “We have a high marginal rate,” which encourages companies to avoid taxes and puts the United States at a global disadvantage.

    “And we have low average rates” — because of all the loopholes — “which indicate that we’re not collecting as much as we used to, given the very high level of corporate profits.”

    The crucial questions are how to pay for a lower rate and how to prevent abuses. Corporate tax cuts that lead to huge deficits could hobble the economy. And a territorial system without sufficient safeguards could end up encouraging even more businesses to shift profits, operations and jobs to countries with lower tax rates.

    Other nations with territorial systems have tried to prevent companies from wriggling out of paying taxes, while tax experts have suggested proposals ranging from a minimum global tax to tighter rules to prevent companies from relocating their patents and copyrights to tax havens like Bermuda and the Cayman Islands.

    But skeptics worry that making the system airtight is impossible. “It’s an endless cat-and-mouse game,” said Matthew Gardner, senior fellow at the Institute on Taxation and Economic Policy, a research group based in Washington. “What’s driving companies to engage in paper transactions is not our 35 percent tax rate,” he said, but other countries’ willingness to undercut whatever rate the United States settles on. “You can never win if you are competing against their zero tax rate.”

    Mr. Gardner argued that a broader definition of American competitiveness is needed that includes not only the tax system, but also the business infrastructure that the tax system supports — bridges and roads, health care, education and research and development. “If all you think about is the tax rate, then it should be zero,” he said. “Competitiveness is about finding the right balance.”

    The damage inflicted by Hurricane Harvey on Texas — which Mr. Trump has promised to help address with federal money — shows how quickly new budget demands can materialize.

    Establishing rates that are sustainable over the long haul contributes to economic growth. “If Republicans cut tax rates to levels that are unsustainable, everyone will believe rates will go up,” said Joseph E. Stiglitz, a Nobel Prize-winning economist and the author of several books on globalization and economic inequality. “And that means you’re going to get even less investment, because they are looking at future tax rates.”

    In general, though, Mr. Stiglitz argued that the link between tax cuts and economic growth is vastly overstated. “There is no evidence that cutting the tax rates stimulates more investment,” he said.

    “Growth is low because labor force growth is slow,” and it is only going to grow slower because of immigration restrictions, he said. “And we’re not investing in education and research, which is why productivity is slow. The notion that changing taxes is going to lead to a growth spurt is pure nonsense.”

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  3. Apple has $7 billion trapped in China due to there policy of limiting exporting wealth so you can only transfer so much per year out of China. Wall Street Journal did a report years ago about the effects of bringing home money from overseas when they did it years ago and found most of the money was in American banks, turns out lots of banks overseas won't insure billions of wealth or don't have large enough banking market with reserves. So repatriating the wealth had little effect since the wealth was already here, Dell was one of there prime examples.