The Foreign Account Tax Compliance Act (FATCA) goes into full operation on July 1st of this year. Some analysts predict that it will spell doomsday for the U.S. dollar. Here is a lengthy Stansberry video that makes that case: http://pro.stansberryresearch.com. There are others who seem pretty concerned about this as well. The concerns have been sufficiently voiced that the Treasury Department felt compelled to provide a response (Myth vs. FATCA).
Basically, the law requires individuals and institutions to report to the IRS information about foreign accounts and earnings. From Value Walk:
What is FATCA?
FATCA was signed into law on March 19, 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Starting next month, participating foreign financial institutions (FFIs) are required to annually provide the Internal Revenue Service with names, addresses and account details of all American account holders with assets over $50,000. This includes U.S. citizens, those with dual citizenships and those holding American green cards. If such persons conduct any sort of financial activity in a foreign country—from banking to investing to buying insurance—they must be identified. Otherwise, the U.S. will impose a whopping 30 percent withholding tax on all U.S. securities transactions.
At first glance, that seems pretty routine–hardly sufficient to bring on financial Armageddon. But, as with most Federal law, the devil is indeed in the details. There are risks that this law will make it less desirable for foreigners to do business with Americans. There will be a reduced desire to hold dollar-based assets. There are even negative implications for foreigners who fall in love and want to marry American citizens. The law will make it more difficult to open foreign accounts of any type. It is further government intrusion, impacting some 6.8 million Americans who live and work abroad, most of whom were properly paying their taxes. The goal is to scoop up the tax avoiders but as usual, all of us will pay a price at some level. Again, from Value Walk:
It appears that the unreasonable and expensive mandates prescribed by this law will be felt hardest not by wealthy "fat cat" tax dodgers but hardworking Americans who have no intentions of cheating the tax system: students studying abroad, missionaries, charity workers, members of Doctors Without Borders, professionals doing a stint in their companies' overseas branches and many more. FATCA makes no distinction between the honest and dishonest. Everyone, from the Rhodes Scholar to the al-Qaeda financier, is lumped into the same pool of suspects.
Beyond that burden, the legislation does put further pressure on the dollar's already stressed status as the primary world reserve currency. And yes, this smacks of further American imperialism likely to build resentment even among our allies. But, will July 1, 2014 really be "the day the dollar dies?"
Nations around the globe have signed on to the FATCA agreement as shown in the table below.
Perhaps the greatest concern involves the trillions of dollars in cross-border investing that will be subjected to greater scrutiny. There was about $2.7 trillion of foreign direct investment in the United States and about $4.5 trillion of American investment in foreign nations in 2012, according to Commerce Department statistics. That's just a fraction of inter-nation investing when all aspects are considered. But it does give an idea of how much would be at stake if FATCA were to destroy cross-border investing.
While we may not know the full outcome till after next week or even later as the implications are revealed, it does seem unlikely that this will be the dollar-killer that many have feared. Actions underway by Putin are a much greater threat. But, it is clear that FATCA does not enhance the dollar's role and actually diminishes it in a variety of ways. The very unfortunate thing is that it will likely not generate the revenues expected as the market will find creative new ways to avoid taxation and global relationships will be strained. The Joint Committee on Taxation estimated just $792 billion per year in new revenues–hardly an impressive windfall for a government whose spending is measured in the trillions.
So Will the Dollar Die on July 1, 2014?
First, it is important to note that many of the people predicting with specificity the dollar's demise have made such predictions before. Just a few of years ago, the "date certain" for the dollar's death (and stock market collapse) was pegged at April 12, 2012. There was a viral email chain making that prediction (along with correspondent internet videos loaded with plenty of seemingly powerful facts). Of course, April 12, 2012 came and went without incident. The stock market was supposed to crash that day. Instead, the Dow rose almost 200 points on April 12 and has risen from 12,800 to over 16,800 since. Clearly, the world didn't end. Of course, it's possible that it might end July 1st but unlikely that FATCA would be the cause.
Everyone is aware of the law and its effects. Those who wanted to shift money in response have already done so and the dollar and market have held up so far this year. This does not mean that the law won't hurt Americans with unintended consequences over time. It likely will. But it is doubtful that July 1 will trigger cataclysm (unless Putin decides to push into high gear with his dollar attack on that date).
A reasoned review of FATCA was recently provided by Sean Hyman at MoneyNews (excerpts below):
What Happens When FATCA Kicks InMay 24, 2014 12:34 PM by Sean Hyman There are reports that attempt to spark fear in the investor, saying that the dollar will collapse on July 1 when this bill goes into effect. I just want to go on record by saying that is ridiculous and that it's not going to happen. Yes, the dollar will continue its gradual erosion…but there will not be a collapse on that date nor any other date soon. Why? Everything always goes back to politics. So you must view this through the eyes of an elected official. If the dollar instantly collapses, what's going to happen? There would be riots in the streets and the risk of a political overthrow. At best, the current elected officials would not be re-elected and new officials would be voted into their places. They can't have this. Therefore, they aren't going to allow a quick dollar collapse to happen. Secondly, the Federal Reserve has much more to do with the speed of dollar depreciation than any governmental law that's passed. Now, with that said…will this bill be a "dollar negative" and a negative for the U.S. overall? Yes! There's no doubt about it. Why? The more pain and headaches you cause foreigners, the more they're going to just want to say, "We're just not going to deal with U.S. clients. We'll focus on other countries that don't have all this red tape to deal with." Why is all of this happening now? Remember, the United States has enormous debts that are growing massively on a daily basis. Also, the tax receipts that the government takes in aren't high enough to meet their outgo. So what does the government do to help rake in more cash? They go searching for the money abroad. The more indebted our government gets, the more aggressive and unreasonable they're going to be on the public (until or unless there is a massive public outrage).
But back to FATCA. Yes, it will be bad for the dollar, bad for U.S. assets and the U.S. economy. Why? More foreigners will cut ties with the United States as the red tape gets ridiculous relative to what they have to deal with in other countries. It will also make it harder for U.S. citizens that want to do more investing abroad and who want to own more assets abroad. After all, what bank, broker or insurance company is going to want to deal with the headaches that an American will bring upon them due to these new requirements? Instead, they'll just focus their business more on Europeans and on emerging markets where there isn't such strict regulations placed upon them.
Don't get me wrong. I'm all for people paying their fair share of taxes and not trying to dodge any taxes that they are supposed to pay. But these regulations are going to make foreigners back away from Americans and America in general. That's going to be just one more hurdle for our dollar, our economy and financial markets.
By the way, FATCA is just the beginning. There will likely come a day where the United States doesn't allow you to take money outside of its borders. They'll want even more control over you and your assets and if you can't take your money out of the country — they've got you!
But for now, a "side effect" of FATCA is that you'll have more high net-worth individuals expatriating and giving up their U.S. citizenship. After all, if you have sizable assets overseas and you have a home overseas, etc. (like many ultra-wealthy people do) and you still want foreign banks and brokerages to want to deal with you — then you'll need to cut ties with the United States. And the only way you're getting out of U.S. taxation is if you expatriate and turn loose of your U.S. citizenship. (By the way, even if you do this, you can still come back into the U.S. for a number of months each year.)
So FATCA will have an impact. It will be a negative impact and not a positive impact. But these reports that you're hearing where "the dollar will collapse on July 1," etc., are just hog wash! Don't believe a word of it. Granted, it is effective marketing on their part — it will likely be effective in getting them more clients, but at the end of the day it's just fear-mongering at its worst. And to top it off, it's simply not true.
Should you change your investing strategy in light of FATCA? The way you invest should be to invest in light of a falling dollar and rising inflation anyway. So if you're doing that already, then you don't need to change anything. It will be a "dollar negative" and certainly play its part in the dollar's gradual erosion but it's not going to cause a collapse in the dollar. And if your investments benefit with the decline of the dollar and the rise of inflation and there were to be a collapse of the dollar — then your investments would just go up that much quicker. So even though a "collapse" isn't going to happen … the positioning of your investments is key, either way.
That's a pretty good summary. The dollar is still at serious risk, but if you are expecting to see fireworks, they probably won't happen on July 1st. You'll have to wait for the 4th.