Some thoughts on recent developments affecting the prospects for the USD.
QE2
While it may (in theory) be beneficial for growth, US stock market indexes and inflation it is, in my opinion, certainly bad for the value of the USD.
The potential costs of unwinding both QE1 and QE2 in the future are as yet unquantifiable and, as such, are quite daunting (there is no historical precedent to draw on).
I have to admit that I can’t get my head round how inflation can be helpful to Main St – I view inflation as one of the biggest wealth reducers for the middle classes who work hard and save for their retirement only to see their savings evaporate from inflation.
Being somewhat cynical, I find it difficult to view QE2 as anything more than a short term placebo whose sole financial beneficiaries will, once again, be Wall St (at the expense of Main St).
Mid Term Election
The only specific cuts talked about in the campaign were “tax cuts” - there was endless rhetoric about spending cuts but none of the parties would say where they would make them.
While there is a plentiful history of talk by Republicans on fiscal conservatism, analysing the annual Financial Reports of the US Government available from the US Treasury shows that, regrettably, it is nothing more than just talk.
Reports available here:
http://www.fms.treas.gov/index.html
US Corporate Profits held overseas
US corporations are currently holding nearly a Trillion USD in cash overseas from profits made in their operations there - this cash is being held overseas and not repatriated to the US because the profits only become taxable in the US when the profits are repatriated to the US.
Put another way US corporations are holding the equivalent of about one and a half times the TARP limit of 700 billion outside of the country which, in theory, could have been reinvested in and benefited the US economy and GDP.
As has been seen over the last couple of years with the THB cash flowing in or out of a country is a factor in strengthening or weakening a currency – a trillion USD flowing into the US would help to strengthen the USD (or at the very least reduce the rate that it weakens).
So not only were the manufacturing jobs exported overseas (and the wages that they paid), but the taxes on the profits were lost and, furthermore, no taxes are being paid on what are bigger profits that were previously being made (none of which helps the budget deficit).
Adding insult to injury, some of those same companies with massive cash balances held overseas are, rather than repatriating the cash and paying taxes, issuing bonds in the US (which are tax deductible) so they can pay dividends.
It appears that behind the scenes there is some pretty intense lobbying going on for a tax holiday on overseas earnings so that they can avoid having to pay tax.
In mitigation, looking at it from the corporate perspective, companies have a duty to their shareholders to maximise their returns and, as such, could actually be sued for acting against the interests of shareholders if they did repatriate the cash and pay taxes. There is absolutely nothing illegal in keeping cash outside the country to avoid paying tax, the downside is on the budget deficit and the value of the USD.
I should point out that if I was the CFO of any of the companies involved I would be doing exactly the same as they are doing – the only way that I would repatriate the cash would be if, in my judgment, avoiding tax now might be prejudicial to the longer term future of the business.
CAVEAT – while I used to have a reasonable knowledge of US corporate and tax law I am no longer fully “au fait” with it so my interpretation above may well be incorrect; anyone with current knowledge please feel free to correct as appropriate.
