Donald Trump's appetite is whetted. He knows that American companies have stashed trillions of dollars overseas in the greatest cash reserve in the world.
Apple has $US257 billion ($333 billion) parked abroad beyond the reach of the US tax office, the Internal Revenue Service. Google's parent company Alphabet has $US126 billlion, Microsoft $US84 billion and Cisco $US68 billion. The US Bureau of Economic Analysis estimates that total retained earnings outside the country have mushroomed to $US4 trillion.
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The president is determined to lay his hands on this money, or at least to divert it back into the US economy. The latest briefings from Washington suggest that the White House is preparing "mandatory" action as part of his tax reform, unlike the previous voluntary attempts to lure back money through tax holidays.
If Trump succeeds, these repatriated capital flows will have a volcanic impact on the US dollar, Wall Street, and the global financial system, with big winners and big losers.
Companies leave the money abroad because the US corporate tax rate is the world's highest at 35 per cent. Their overseas subsidiaries pay (lower) taxes in host countries - very low for Apple in Ireland. The residual US liability is triggered only if profits are sent home.
John Shin, from Bank of America, says a big chunk of this cash is in other currencies. The funds would have to be converted on the exchange markets. When this happened after the "tax holiday" in 2005 it caused the US dollar index (DXY) to rocket by 15 per cent over 12 months, reversing the secular dollar slide of the era. This time the sums are much larger.
The Congressional Research Service thinks just 46 per cent of the money held abroad is in US-denominated assets. Technology giants hold more in greenbacks but the implication is clear: there may be a stampede into the US currency, whatever Trump says about the virtues of a weak dollar. He would be overwhelmed by his own policy. Whispers of a trillion-dollar conversion are doing the rounds.
Shin's survey of 300 firms found that most have no plans to invest repatriated funds in the real economy - as Trump hopes - but rather for "paying down debt" (65 per cent), "share repurchases" (46 per cent), or company "mergers and acquisitions" (42 per cent).
![We have the potential for a perfect dollar storm - a Hurricane Irma in the exchange markets - ripping through the global ...](http://web.archive.org./web/20170908191932im_/https://www.fairfaxstatic.com.au/content/dam/images/g/y/b/s/7/2/image.related.articleLeadwide.620x349.gycdg7.png/1504835783507.jpg)
This is worth a thought. A $US4 trillion flood would cause US corporate debt issuance to dry up and would - ceteris paribus - send Wall Street equities into a parabolic rally akin to the dotcom blow-off in 1999.
Normally one might wish to batten down the hatches at the current late stage of the economic cycle, but the politics of Trump make the denouement of this cycle wildly binary.
![Write off Trump at your peril.: The US president as he boarded Air Force One after his visit to see the impact of ...](http://web.archive.org./web/20170908191932im_/https://www.fairfaxstatic.com.au/content/dam/images/g/y/9/n/y/k/image.related.articleLeadwide.620x349.gycdg7.png/1504789753757.jpg)
It would be crueller for those on the wrong side of the global dollar trade. David Bloom, from HSBC, says that repatriation could have seismic effects even if it is already in US currency abroad. Shifting it would drain dollar liquidity from offshore markets, tightening the supply of corporate credit in Asia or Latin America.
This could happen just as the US Federal Reserve pulls the trigger on "quantitative tightening" and starts to unwind its $US4.4 trillion balance sheet, draining yet further dollar liquidity.
There may be a stampede into the US currency, whatever Trump says about the virtues of a weak dollar. He would be overwhelmed by his own policy. Whispers of a trillion-dollar conversion are doing the rounds.
We have the potential for a perfect dollar storm - a massive hurricane in the exchange markets - ripping through a global financial system that has never been more leveraged to the US dollar.
Yet currency analysts and hedge funds are mostly positioned for the exact opposite. They have written off meaningful action from the White House on tax reform this year, betting on a slow, relentless slide in the "Trump dollar". Nomura expects the euro to reach $US1.40 over this cycle, arguing that a "multi-year downtrend" is under way for the dollar.
Didier Saint-Georges, from Carmignac, sees the end of American hegemony altogether as Trump fritters away US leadership. "The dollar is under threat. We are witnessing something unprecedented: a convergence of economic and political factors severely questioning the US dollar's status as the world's dominant global currency," he said.
This is not my view. I regard the Trump episode as a brief anomaly - like the Jackson presidency of the 1830s - with no bearing on US long-term prospects.
America remains the scientific superpower. There is no challenger: Europe is in demographic decline; China has failed to grasp the nettle of reform under Xi Jinping and may slow to 2 per cent growth rates by the early 2020s.
Needless to say, we have to get through September and October of this year first. It is always possible that querulous Republicans will shut down the federal government. The House Freedom Caucus may block efforts to raise the $US19.8 trillion debt-ceiling before the money runs out in mid-October, precipitating a technical US default. What that would mean is anybody's guess.
'More catastrophic than Lehman Brothers'
"A shutdown combined with failure to raise the debt limit would likely be more catastrophic to the economy than the 2008 failure of Lehman Brothers," said Standard & Poor's.
The Korean crisis could spin out of control. There are a lot of "mights", but let us assume that none of these idiocies actually occur.
Amid all the noise, the "big six" congressional leaders have been working with the US treasury to thrash out tax reform. The drafting is being left to the House and Senate committees. Trump has learnt his lesson from the healthcare debacle.
While the Republicans are prone to ideological fist-fights, they control both Congress and the White House, and will be held to harsh account in the 2018 elections if they prove incapable of converting power into legislation. They need an "easy win".
By November markets may have moved on from today's Trumpian dramas to a radically different narrative: an impending cut in federal corporation tax from 35 per cent to 20 per cent or so, and middle class tax cuts across the board. Trump is already on the campaign trail pushing his reform.
"If we're going to keep momentum going and allow the economy to truly take off as it should, it is vital that we reduce crushing tax burdens on our companies and on our workers," he said. He too needs an easy win.
If he secures what he wants - or anything like it - the stimulus effects will turbo-charge a US economy already hitting a labour shortage and capacity constraints. The Fed will have to slam on the monetary brakes.
The international financial system will rock violently on its dollar axis. Write off Trump at your peril.
Telegraph, London
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