Now we will start to see reality begin to become real in our financial and economic systems. Today, a new President takes over. Regardless of your opinion on the matter, he is going to implement policies that if successful will put sustained upward pressure on the U.S. dollar. A strong dollar in 2017 however is much different than a strong dollar in 1997. The fundamental nature of the global economy has changed, and the structure of the global financial system is radically different.
Because of high US tax rates on businesses, estimates are that there is up to $3 trillion in profits held by US companies outside of the country. If corporate tax rates are lowered to 15% to 20% as President Trump proposes, a trillion dollars could flow back into the United States. This would create a tremendous demand for dollars for those profits held in other currencies.
Be Careful What You Wish For
We all want a strong domestic economy and robust investments in business. Repatriating this money could help create an investment boom in the United States. A strengthening domestic economy would attract even more foreign capital and further strengthen the dollar. And therein lies the rub. A strong dollar hurts US exports by making goods and services more expensive overseas. It also hurts US companies operating in foreign markets by lowering profits that are generated overseas. These competing forces create cross currents in the markets which can increase volatility.
Add to that the reality that many “emerging market” nations have their currencies pegged to the dollar. A rising dollar crimps their ability to compete in the global market and increases domestic inflation pressures. The global economy as well as many people in those nations suffer as a result, further lowering demand for US goods and services.
Such are the consequences of tax rates that were out of balance with the rest of the world. Globalism was built on a world reserve currency whose nation’s tax and trade policies (that’s us) encouraged the world to gorge itself on these debt backed instruments. Now, any attempt to correct the resulting imbalances by normalizing tax rates and focusing on domestic economic growth creates a situation that is difficult to “win.”
Decade long trends in the largest markets in the world – the bond and currency markets – are reversing. Rates are rising and the dollar is strengthening. Both will likely create significant cross currents as the world tries to figure out what these trend changes mean in a world that is shifting away from globalization during what is already an unsettled financial and geopolitical landscape.
The result is that markets will likely experience a period of sustained enhanced volatility. That includes gold and silver.
However, when cross currents like these develop, gold and silver prices catch a bid as their role as one of the most time-tested assets to protect savings and wealth during times of uncertainty.
Here is a link to some other articles from our blog and news site this week:
(photo credit: albertstraub)