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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

U.S. Dollar Repatriation and Inflation

Economics / Inflation Jun 24, 2011 - 02:40 AM GMT

By: Jeff_Lewis

Economics

It’s starting to look like the corporate world will soon get another pass from Congress on paying its international tax bill.  Last proposed and passed in 2005, a dollar repatriation holiday would allow companies to bring dollars on overseas back to the United States with only a 5.25% tax rate.


What the New Proposal Means

Ordinarily, the US government taxes corporate earnings at a rate of up to 35%.  Proponents of the new measure say that it would allow for more capital spending here at home while, others say that it will only result in more share buybacks and dividends to reward investors, not job seekers.

At any rate, we have to wonder what such a policy might do for domestic inflation and dollar values.  In allowing conglomerates that operate internationally to bring their cash back to the United States, many will have to buy dollars to make the transaction, temporarily boosting the value of the dollar.

Additionally, the repatriation of capital to American soil could bring inflation.  Corporations have as much as $1 trillion overseas, and many won’t think twice about bringing it home inexpensively.  Analysts have noted that recent bond offerings to raise funds from cash-heavy conglomerates may be part of an accounting scheme to raise post-tax US dollars as domestic bank accounts dry up.  Companies have little incentive to bring back dollars to the US when they can borrow cheaply; however, new tax policy would allow for a wall of dollars to flow back into domestic markets.

Short-term Boom

It should be expected that anything to come of a tsunami of credit would be temporary.  The dollar may rise further against the Euro as international capital stored in euro-denominated tax havens comes back to the United States. 

It should also be expected that the equity markets will rally on such news.  In bringing capital back to the United States, companies will reward shareholders with heftier dividends and share buybacks, which increase shareholder ownership of a company by reducing the total shares of stock outstanding.  Naturally, large capital inflows reward companies thinking about making new acquisitions domestically, and high-dollar bids for largely American brands should help to revive a merger and acquisition spree that has stalled into the summer months.

Realistically, nothing will change with any dollar repatriation.  The markets will find equilibrium again for the dollar, and any happenings in the metals markets will reverse.  We expect some consolidation should this proposal be approved as a slurry of new deals, dividends, and general optimism for the US economy pushes the equity markets to overheat once more.

In the long-term, moving capital from international shores to the United States should concern inflation hawks.  In keeping capital overseas, the domestic inflation rate remains artificially low.  When the capital returns to the United States, it will flow to money market accounts, T-bills, and short-term debt markets to chase yields.  However, all this new capital will eventually be spent as it will be far more accessible by corporations and investors.  Await inflation should this proposal work its way through government; you may even get a chance to buy on a temporary, emotion-driven dip.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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