Be careful what you wish for.
I'm talking about the estimated $2 trillion in U.S. corporate cash sitting in foreign banks - and the Trump-backed proposal for a special 10% repatriation tax on those profits.
The hope and belief is that a big chunk of that money will come home, giving the GOP-dominated Congress plenty of cash to spend on pet projects like a giant-sized boost on infrastructure spending. There's no question that the tax will go through in some form, or that Congress and the new Trump administration will find plenty of uses for it.
But when it comes to what that repatriation will do to the U.S. dollar, well... read the sentence at the beginning of this article.
Let's look at the impact on the U.S. dollar the last time Congress pulled off a major repatriation "tax holiday" back in 2005. The enabling legislation was called the U.S. Homeland Investment Act, a one-year tax break for big American multinational firms.
At the time, Goldman Sachs estimated the legislation resulted in the repatriation of some $300 billion over the course of the year. And what happened to the dollar?
First, an unsustainable surge that lasted the entire 2005 calendar year...
But when the repatriation period ended, and companies stopped converting their foreign-held currencies into dollars, so did the rally - leading the dollar to an inevitable cliff dive during the following two years.
We can certainly argue about the Federal Reserve's efforts to raise rates (making the dollar more attractive to investors and raising its value relative to other currencies) and rein in the surging U.S. real estate boom and overinflated economy.
But the Fed began raising rates in earnest in mid-2004 (from 1% to 1.25%), and didn't stop for two straight years until the fed fund rates hit 5.25% in mid-2006. By then, the dollar was already six months into a major decline. And the major stock market indexes wouldn't finally roll over until October 2007.
The point is that the repatriation of even a small amount of corporate America's current $2 billion in offshore cash could have a profound impact, with a tremendous surge in the value of the dollar as companies sell yen, euros and yuan to buy dollars instead.
A parabolic dollar surge is something that we've warned about for some time as a prelude to a brutal economic collapse.
In essence, it would be the final climactic dollar-buying frenzy after nearly two decades of too many Fed-induced digital dollars chasing the "same old, same old" overpriced stocks, overpriced bonds and overpriced real estate.
Wouldn't it be ironic (and tragic) if the very thing that signaled a hoped-for resurgence of the U.S. economy (the billions in presumed infrastructure spending) was the very thing that wrecked it instead?
A veteran investor and longtime financial journalist, JL Yastine is a contributor to Sovereign Investor Daily.
He also serves as editorial director, focusing on creation and
development of new products and editorial resources that will help the
Society's members "be Sovereign." Read more at The Sovereign Investor Daily.
By
JL Yastine
