Is Tax "Reform" Good for the US Dollar? How About Gold?

Let's investigate what happened after the last 3 major tax reforms. Another "reform" is on deck.

I picked up this idea from Holger Zschaepitz, @Schuldensuehner, who made the following Tweet, posting a chart from Bloomberg.

In the following chart, I add a key piece of legislation that someone inadvertently overlooked.

Tax Reform vs US Dollar 1986-Present

Key Dates

US Dollar Synopsis

  • Following the 1986 legislation, the dollar fell about 22% over the next six years.
  • Following the 2001 legislation and continuing with the 2003 legislation, the dollar fell about 37% over the next seven years.

What's Next?

The Senate version of the bill is likely to add over $1 trillion to the deficit, while not even cutting taxes beyond 2027.

A bill that adds so much to the deficit is not US dollar supportive, to say the least.

However, one cannot view these things in isolation. How the dollar reacts also depends on events in the Eurozone, China, and Japan, as well as Fed interest rate policy.

Global Currency Debasement

Global currency debasement is underway.

Things may be even crazier elsewhere, so a decline in the dollar is not guaranteed.

A Driver for Gold

Sooner or later, competitive currency debasement will matter.

Gold is likely to be the primary beneficiary.

I wish I could tell you when this matters in a major way.

Gold vs. Faith in Central Banks

Amazing Non-Reform Act of 2017

I have a suggestion for the name of the pending legislation: The Amazing Non-Reform Tax Act of 2017.

For further discussion of the "non-reform", please consider Tax Bill Analysis: Spend Your Extra $100 Wisely.

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Mike "Mish" Shedlock

Comments (15)
No. 1-15
AWC
AWC

Au, the New TINA? Beginning to think so after days of research on where to go with a new IRA conversion. Not much out there that makes any sense anymore, other than real money.

Tezza
Tezza

More likely better for crypto currencies.

Blacklisted
Blacklisted

The dollar decline in the 2000's was primarily due to the birth of the euro, which was hatched in the 1985 Plaza Accord, that sought to manipulate the dollar lower, which it did, and caused the exodus of capital that caused the 87' crash. The coming rise is the dollar will be driven by instability in Europe and Japan, and rising rates and lower corporate taxes will only add fuel to the dollar bubble, which will be the cause of the next and biggest financial crisis. Everything is connected, just as sure as political intervention will exaggerate the problem, and blame will be pinned on foreign boogymen and evil businesses.

Gold will rise with the dollar, stocks, Bitcoin, and other safe havens.

shamrock
shamrock

What about economic growth from tax reform? George W. Bush cut taxes twice and GDP averaged 1.79% growth in his 8 years. Obama raised taxes significantly on the high earners and growth averaged 1.87% for his 8 years.

doraemon
doraemon

Bitcoin's rise in 2017 was driven first by Chinese needing a way to get money out as capital controls tighten; then by South Koreans (a major gambling nation and a way to funnel proceeds from a red hot stock market which has risen over 30% in spite of the North Korean crisis - each time North Korea fired a missile, Kospi rose to new record (I wouldnt exactly call that a rational reaction - certainly there was no need to panic but to keep buying to new record highs is another matter) and now by Venezuelans, Africans and soon the jolly come lately Europeans waking up to the game;

shamrock
shamrock

Off topic, the banner ad which keeps coming up on this page is for "bitcoinira" which encourages you to buy bitcoin with retirement savings. God help you if you're that stupid. The crash can't be far off now.

TheCaptain
TheCaptain

Ha Ha! @ Blacklisted, bitcoin is a "safe haven"??? HA HA!! Bitcoin is a mania. The dollar might rise but at some point it will peak and after that there will be a global currency event where the global dept ponzi finally goes into freefall. When that happens the precious metals will be gold, silver, guns and lead.

El_Tedo
El_Tedo

There’s a buzz that California Republicans in the House are have 2nd thoughts about
tax reform without the full SALT deduction. The bill isn’t 100% certain.

Greggg
Greggg

El Tedo - I doubted whether either of these tax bills were going to pass. 2018 is an election year, so Congress members are going to use their time either fundraising or grandstanding, and that's especially true in California.

truthseeker
truthseeker

Mish if you haven’t already read it off Zero hedge might like

RobinBanks
RobinBanks

Shame America and the UK don't buy 35 tonnes of physical gold a month and have a debt to GDP ratio of 8%. There's a lot Trump could learn from "the Don" Putin.

DHolzer
DHolzer

@shamrock hah! completely agree. Luckily my banner ads are for QLED TVs and Duracell batteries. Regarding the Tax Cuts and Jobs Act, I prefer to call it "tax re-form."

theplanningmotive
theplanningmotive

1986 fall had more to do with the Plaza accord and an overvalued dollar than with the tax cut. Indeed the tax cut was part of the pending accord.

Realist
Realist

Tax "reform" is merely tinkering; it is not a game changer. Assuming it passes in some form, most of the (limited) benefits are front-end loaded. Tax cuts of any significance would only end up raising both the federal deficit as well as the trade deficit. This might buy votes before the next election, but it will do little to stimulate the economy to any degree (the economy doesn't need stimulating anyway). To those who say that the US needs to lower corporate taxes to make its companies more competitive: you are assuming that other countries won't respond in kind. But they will. It will be a world wide race to the bottom for lowest tax rates. This will result in larger deficits in many countries. This will further reduce faith in conventional currencies and increase demand for both gold and crypto currencies. Crypto allows for further investment diversification but is very speculative. Do not risk more than 1-2% of your portfolio in crypto. My original 1% grew to 5%, so I cashed out and reduced my position to 2% (now 3% after the last two days). It's fun, but only when it's going up. Stay diversified.