U.S. Firms Brought Money Home In Droves Due To '05 Tax Break

INVESTOR'S BUSINESS DAILY ^ | 1/11/2006 | JED GRAHAM

[CAWats]

The one tax cut that just expired injected more money into the U.S. economy than all of the other Bush tax cuts combined last year.

Initial estimates suggest that a steep tax cut on the repatriation of foreign earnings likely induced companies to bring home nearly $350 billion that they had permanently stashed overseas.

The surge in repatriated funds was triggered by a provision in the 2004 American Jobs Creation Act that cut the effective tax rate on earnings of foreign subsidiaries to 5.25% from a maximum 35% for one year.

[Mad_Tom_Rackham]

Interesting bump.

[Fiddlstix]

BTTT

[staytrue]

yes and this was one of the drivers for the US dollar going up.

look for the dollar to move sideways at best.

disclaimer: I am short about 800k of dollars precisely because of this fact.

[phoenix0468]

Sorry for your pain. I don't think I've made 800k in my entire lifetime.

[staytrue]

they are futures contracts at 20 to 1 leverage or more.

costs about 20k for a deposit to short 800k in the dollar.

[RTINSC]

Democrats are getting payback from GW for their 1992 "It's the economy, stupid" campaign..

[phoenix0468]

Uh, how risky is this venture? And if your talking 20 to 1 return, how do I get in on it?

[staytrue]

don't do this. it is very risky in that you can lose much more than your deposit.

[staytrue]

FYI, SHORT means you think something will lose value.

LONG is the opposite of short and means you think something will gain in value.

[Tunehead54]

And if the dollar surged past the Euro?

---

Honest inquiry - do you lose just the 20 or have to cover? I thought the dollar was gaining on the Euro and with our economy booming and Europe's being anemic?

[staytrue]

If you start losing money, you have to dump your positions or add more money to your deposit.

There are no paper losses. Your position is marked to market every day.

[ground_fog]

alot of forex systems now have triggers that will liquidate your position before a margin call if you are short-fwiw

[phoenix0468]

but if you liquidate your position on a short wouldn't you still encur a pretty substantial loss?

[n-tres-ted]

Please explain why this repatriation of dollars would cause the dollar to increase in value, i.e., "go up."

[staytrue]

good question.

I believe that these profits when held overseas are likely to be invested in foreign currencies although they could be invested in "eurodollars"(short term CD's held at foreign banks denominated in dollars).

When you repatriate them to the US, they are likely to have been converted to US dollars, pushing up the value of the dollar. Although, they may have been hedged and unwinding the hedge would have counteracted the move.

So I'm guessing the most likely thing is that repatriation would cause the dollar to go up if the positions were held in foreign currencies and they were unhedged.

[n-tres-ted]

Thank you for your response. The economist from HVB Americas quoted in the article apparently agrees with your analysis. However, I respectfully disagree that currency conversions alone create more or less demand for the currency. If the dollars were converted to other currencies abroad, the dollars would still exist and must be put to use (invested) or they become excess liquidity, thereby causing inflation (loss of dollar value). Likewise, when the dollars are brought back to the U.S., this does nothing to strengthen the dollar unless there are good reasons to invest the dollars productively. Fortunately, the other Bush '03 tax cuts have provided higher returns on capital investment, so demand for dollars has been relatively strong, EXCEPT for the counterproductive Fed actions increasing cost of credit. The Fed has purposely slowed the economy, discouraging investment, and thereby reduced demand for dollars, creating excess liquidity and reducing the dollar's value. Whether the Fed will continue such ill-advised policy remains to be seen.