The Independent Market Observer

5/15/14 – Is FATCA Bad News for the U.S. Dollar?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 15, 2014 12:30:00 PM

and tagged Politics and the Economy, Ask Brad

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Recently, several readers have written in with questions about House Bill 2847—specifically, the Foreign Account Tax Compliance Act (FATCA) section, which takes effect in July.

Essentially, FATCA will require foreign financial institutions to track, report, and potentially withhold taxes from accounts owned by U.S. citizens and entities. The act will introduce complications (and potentially significant liability issues) for those institutions, many of which have already become less willing to work with American citizens and entities.

Some critics have gone so far as to argue that, as a result of the new requirements, foreign companies and banks will dump the dollar, shun the U.S., and leave us high and dry.

Complications, yes; disaster, no

Big picture, this theory doesn’t make a lot of sense. First, even with the additional burden FATCA imposes, the overall economic and regulatory environment is still much freer than in past decades. Second, many other countries have laws that raise similar issues, and there’s been no mass shunning. Third, let’s face it: for pretty much any trading economy, bypassing the U.S. simply isn’t an option. You may want to ignore the elephant in the room, but it’s pretty hard when it’s sitting on your foot.

Let’s take a closer look at some of the questions that are circulating:

  1. Does this mean the dollar will no longer be the world’s reserve currency? Do you think Congress would vote to devalue the U.S. dollar? In any case, it’s not subject to vote; the markets drive the value of the dollar.
  2. Will the value of the dollar be reset to much lower than the current value? U.S. interest rates are down because it’s a low-risk country. Rates would be much higher if the market—which includes very savvy investors—saw a chance that the dollar would be significantly devalued. Gold prices are also down significantly, showing that investors as a group would rather own dollars than gold. The market is speaking, and it’s saying “no pending devaluation” in at least two different ways.
  3. Will other countries and investors dump the dollar? Everyone hasn’t been getting rid of U.S. dollars. Over the past five years, the overall dollar exchange rate hasn’t changed materially.

1

Source: CNBC.com

  1. What happens if the Fed and Congress are no longer allowed to “print money”? Per point 1, the idea that U.S. politicians would cede authority to any other country just isn’t valid. There’s no one who can “forbid” the U.S. government from doing anything. (Would that there were!)
  2. If the government can’t print money, will it have to confiscate pensions and private savings to survive? Based on these facts, and on the country’s improving fiscal situation, there will be no need for confiscation—and even if there were, it wouldn’t happen. First, the government can always create currency to pay its debts. If you can print your own money, you don’t need to take anyone else’s. Second, very significant legal protections, such as the U.S. Constitution, are in place. Even the Greek and Icelandic governments didn’t confiscate IRAs and the like during the recent crises, and we’re nowhere near such a situation.

Bottom line: no cause for alarm

The underlying question here, of course, is whether the dollar is going to collapse. I’ve written about that before, multiple times (here and here), and I have no reason to change my conclusion. The FATCA meme is just one more scare tactic designed to sell investment newsletters. There are real things to worry about, but this isn’t one of them.

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