Metals Notes

Be Prepared, FATCA is coming!

Originally Posted June 6, 2014 –

What is FATCA? Officially known as the Foreign Account Tax Compliance Act, H.R. 2847 became law in March of 2010 but will take effect around the world on July 1, 2014. The ‘official’ goal of this law is to find offshore accounts held by U.S. taxpayers seeking to avoid paying taxes on them. Under the law, banks from around the world will be asked to sift through their accounts to look for clients with U.S. connections, then share that information with the Internal Revenue Service.FATCA targets money laundering and other forms of tax evasion but has potentially dire consequences.

Enacted in 2010 by an all-Democratic Congress with little or no legislative review, the ‘Foreign Account Tax Avoidance Act’ (FATCA) was slipped into an unrelated jobs bill as a budgetary pay-for provision. Set to go into effect July 1, 2014, FATCA is supposedly aimed at American tax cheats with money stashed abroad. But instead of singling out suspected tax evaders, FATCA creates an NSA-style information gathering network requiring all non-U.S. financial institutions (banks, credit unions, insurance companies, investment and pension funds, etc.) in every country of the world to report data on all specified U.S. accounts to the IRS.

In an opinion shared by many, this law could hasten the demise of the U.S. dollar as the world’s reserve currency (defined below). Due to the logistical nightmare this law creates for foreign financial institutions, many foreign banks, etc. will simply move away from the U.S. dollar, potentially weakening it versus other currencies. Several banks have already outlawed international wire transfers originating from the U.S. in anticipation of the headaches associated with FATCA. Clearly, this law will make it difficult for Americans to invest in more stable foreign currencies as well. This is leading some investors to conclude that FATCA will negatively impact the relative strength of the dollar versus other major world currencies. As a logical response, many investors are considering gold or silver bullion as an alternative currency to store and hold wealth.

What is a ‘Reserve Currency’

By definition, a reserve currency is a currency usually held in significant quantities by governments and institutions as part of their foreign exchange reserves, most commonly used for international transactions. As of this writing, the US dollar is still the world’s reserve currency.

There are two primary advantages enjoyed by the US due to the dollar’s reserve currency status. The first benefit of being the world’s reserve currency is seigniorage revenue. This is effectively an interest free loan generated by issuing additional dollars to non-residents wanting to hold US coins and currency. This benefit is estimated to be worth at least $10 Billion annually.

The second and primary benefit of the dollar’s reserve currency status is that the US can raise capital more cheaply due to large purchases of US Treasury securities (debt) by foreign governments and agencies. In recent years, it’s estimated this financial benefit generates at least $100 Billion annually.