Will Exorbitant Dollar Privilege Continue?
Return to Exorbitant Dollar Privilege   Updated 7/7/18   Please link to, use to educate and share


Article copied from econintersect.com/ edits in red from Walter Antoniotti

"How Tax Reform Will Net The U.S. Big Returns"


this post authored by Mark Fleming-Williams

"In December 2017, U.S. President Donald Trump signed into law his country's first major tax reform since the Reagan era.  It will have important ramifications itself, and it will inform the wider trends that occur over decades. It will

1, lead to a repatriation of sizable amounts of cash by U.S. corporations,

2. provide a stimulus for the domestic economy

3. increase the country's debt.

1. Melting the Cashbergs

Under the previous system, U.S. corporations had incentives to hold their spare cash offshore in tax havens.  Technology firms found they could choose where they booked their profits because the product was not physical, making its location harder to pinpoint. opted for tax-efficient locations. Biggest gainers Netherlands, Bermuda, Luxembourg, Ireland, Singapore and Switzerland and The main beneficiaries of this trend have been companies that rely heavily on intellectual property, such as technology firms like Apple, with an offshore stash of an estimated $216 billion, and Microsoft at $109 billion.

A new tax law implemented after the December 2017 was designed to close these loopholes. Lawmakers sweeten the change by allowing a reduced tax repatriated earnings of between 8 and 15.5 percent. Apple will need to pay a one-off $38 billion bill. Change will be relatvely painless- except for, naturally, the countries that have been playing host to these vast sums of money.

2. Positive domestic economic boost from lower corporate tax rate from 35 to 21 percent.

    A. United States competitive increases as more foreign companies with small markets
          move production to US.

   B. Profit windfall from lower taxes can use extra funds to buy back their own shares,
        driving up stock prices, increase production efficiency, invest in new in new technologies,
        and increase in research and development investments.   Apple recently pledged an extra
        $30 billion in its U.S. operations. PR?

3. Decreased tax revenue means more borrowing.
Increased spending on entitlements and defense also increases debt.
         Debt-to-GDP ratio, currently around 77 percent, is predicted by Goldman Sachs
         to be 85 percent by 2021,While high by historical U.S. standards, it is modest
         compared to some other advanced economies.
Dollar privilege softens debt cost as it creates lower interest rates.
Debt's danger is always doubt debtors' ability to pay which requires
         higher interest rates to cover higher risk.
Is this effect is already evident
         as interest rates on U.S. bonds have jumped from 2 percent in 9/17 to
         nearly 3 percent in February) Is this a new debt outlook implied by the
         tax reform and increased spending.
Economic growth a trickle down
     will determine the answer.

  4.  As the pre-eminent global currency the US has a distingue advantage.
      1. Those looking for safety keep their savings in US dollars and 64 percent
          of global currency reserves are denominated in the greenback.
          These people buy U.S. debt and this did not change with the Great Recession.
      2. The pound fell after WW2 after 150 years as global reserve currency.
It survived various economic stresses for its issuer: United Kingdom's debt levels
           remained above 100 percent all the way through until 1860, but investors remained
           committed for nearly a century more. Pound problems began when by 1890,
           the United States became the world's largest economy. Its descent was evident
           by 1918, as London owed Washington massive World War I debts. The pound was
           done by 1947 as another world war and lost overseas possessions made her
           something of an economic  basket case  suffering currency crises in 1947, 1949,
           1951 and 1955. But even the process was gradual as the global reserve inertia
           possessed and the energy required to change to the dollar were are substantial.
           But, the British Empire dependent on other small colonial nation.

5. Predicting the Future
    a. The United States is not dependent on foreign resources and demand.
        These Inherent attributes are particularly key.
        It is large fertile nation with a wealth of natural resources.
        It also has inherent connectivity in the form of an extensive internal river system. 
        Access to the Atlantic and Pacific Oceans make her provides maximum maritime
        access to the world's key power centers and isolation from military challengers.
        It can maintain a giant uncrowned population the e United States as a basic unit
        has a strong claim to being the world's largest economy just by fulfilling its inherent
    b. "it's about time" for the interest rate cycle to reverse and this could be costly. 
    c. China's Renminbi could be a challenger. The article explores this this possibility
         along with US growth potential.
         See "How Tax Reform Will Net The U.S. Big Returns
           from STRATFOR authored by  Mark Fleming-Williams
    d. Dollar Privilege reinforced by Great Recession financial crisis.