US Economic Outlook 2014

End of America 2014, Bill HR 2847; a War on Tax Evasion or Americans?

End of America 2014, 1st July

After decades of worry, the U.S celebrated with a collective sigh of relief on December 21, 2012, when the end of America was averted after the much-lauded cataclysm associated with the Mayan Calendar failed to materialize.

Two years later, and the end of America is once again in sight. On July 1, 2014, Bill HR 2847, better known as HIRE (the Hiring Incentives to Restore Employment Act) goes into effect. At first glance, Bill HR 2847 seems innocent enough; it’s designed to provide payroll tax breaks and incentives for businesses to hire unemployed workers. There can’t be very many people opposed to that.

So why are so many people predicting the end of America on July 1, 2014? You have to dig a little deeper into Bill HR 2847 to find out. A section of that bill, known as FATCA (the Foreign Account Tax Compliance Act) makes it law for foreign banks to report information about U.S. account holders to the IRS; those foreign institutions who do not comply are subject to a 30% withholding tax. The first flow of information on Americans under FATCA is due in 2015, and will cover 2014 accounts.

Why are so many Americans afraid of July 1, 2014 (or F-Day)? Many believe it will usher in the collapse of the U.S. dollar virtually overnight. The fear is that foreign banks will not want to have to deal with the IRS and will avoid dealing with American customers.

And why would any bank not want to have large deposits of U.S. dollars; the global reserve currency? Maybe because they don’t think it holds as much store of value as it once did.

After the U.S. economy tanked in 2008, the Federal Reserve stepped in and took the extraordinary measure of holding interest rates artificially low (near zero) and printed off more than $3.0 trillion through its quantitative easing strategy. The goal was to make it easy for banks to borrow money and pass the cheap money onto customers; stimulating economic growth.

It’s pretty incredible to think foreign banks wouldn’t want to hold large quantities of the global reserve currency. Or is it?

Unfortunately, creating $3.0 trillion out of thin air and dumping the newly printed dollars into the U.S. economy devalued the currency. In conjunction with a devalued dollar, America has also seen its national debt skyrocket from $10.0 trillion before the markets crashed in 2008 to more than $17.5 trillion today.

So why would a foreign bank choose to simply ignore U.S. customers? Because there are stronger, more reliable economies out there: Australia, China, Canada, France, Germany, and Russia, to name a few.

The U.S. dollar has been the global reserve currency since World War II; in effect, Americans can deal directly with any country using their own currency. That means the U.S. can just print off money whenever it wants to either get out of debt or buy something.

Not so for the rest of the world. If France wants to buy oil from the Middle East, it needs to exchange its currency into U.S. dollars. And it can only get U.S. dollars by selling products and services others want to buy first.

No bank is going to want to use a devalued dollar as their reserve currency. With fewer foreign banks wanting to hold large reserves of U.S. currency, the U.S. will no longer be able to keep the printing presses running 24/7 to buy their way out of debt.

Thanks to a devalued dollar, Bill HR 2847, and FATCA, the average American will not be able to exchange their devalued dollar into more stable currencies.

Come July 1, 2014, the U.S. currency could come to a crashing end, taking your life savings along for the ride!

Unfortunately, this isn’t going to happen. Granted, FATCA will not be good news for some Americans with offshore bank accounts, but for the majority of us, HR Bill 2847 is actually a good move for the economy.

In 2010, the last year for which data is available, the U.S. Treasury lost a record $337 billion to tax evasion; that translates into 2.31% of the country’s total GDP. And at $1.25 trillion, America also has the world’s biggest shadow economy.

During the financial crisis, a number of U.S. communities declared bankruptcy. In 2008, Vallejo, California declared bankruptcy; businesses left and taxpayers fled. The economic blight was felt by other towns and counties around the U.S., including Central Falls, Rhode Island; Harrisburg, Pennsylvania; Boise County, Idaho; and Jefferson County, Alabama. In 2012, California municipalities, including Stockton, San Bernardino, and Mammoth Lakes, all declared bankruptcy. And in 2013, Detroit declared bankruptcy.

The fact of the matter is that communities suffer and economies falter when the demand for public services increases during times of economic hardship, but there are too few paying taxes. Tackling tax evasion then, according to Bill HR 2847, is essential if America is to continue to provide healthcare, education, pension, and the other benefits we rely on.

What about the devalued U.S. dollar and banks not wanting to deal with the IRS? The fact of the matter is that the global economy is still pegged to the U.S. dollar, and banking systems cannot afford to sever ties with the U.S.

Case in point, F-Day was supposed to be on January 1, 2014, but it was deferred until July 1, 2014. It was not delayed because banks had to deal with a rash of American client withdrawals or software upgrades to handle FATCA; it was delayed due to overwhelming interest in FATCA internationally.

So far, the U.S. has signed 35 intergovernmental agreements: these include Australia, Canada, the Cayman Islands, France, Germany, Guernsey, Ireland, the Isle of Man, Jersey, Japan, Mexico, South Africa, Spain, Switzerland, and the United Kingdom. The U.S. has also reached agreements with 36 other jurisdictions, including the Bahamas, Brazil, India, New Zealand, Singapore, South Korea, Turkey, the U.A.E., and Hong Kong.

So, will HR Bill 2847 usher in the end of America on July 1, 2014? No. The American economy will not come to an end and the world will not embrace a new reserve currency—at least not yet.

As stated above, America is the world’s biggest economy and the U.S. dollar is entrenched in the global economy. Yes, the U.S. dollar has been devalued, but it still holds value when compared to other currencies and economies. And even when the U.S. economy goes through a major retraction, it still has the economy and infrastructure to sustain itself, grow, and help drive the global economy.

Instead of pondering the what-ifs about July 1, 2014 and HR 2847 being the end of America, it might be better to look at what America will look like at the end of 2014.

Take a cursory look at the U.S. economy and you’d be forgiven for thinking the American economy is on the mend after weathering the Great Recession: Wall Street, the barometer for the U.S. economy, is trading at record highs; the five-plus-year bull market is running unhinged; housing prices have rebounded; and the American jobs market has improved.

But scratch just below the veneer surface and you’ll get a different story. The S&P 500 and Dow Jones Industrial Average are trading in record territory, but it’s not because the company’s that make up the indices are particularly strong.

During every successive quarter in 2013, more and more companies on the S&P 500 revised their earnings guidance lower. During the first quarter of 2013, 78% of S&P 500 companies issued negative EPS guidance; 81% did in the second quarter, a record 83% did in the third quarter, and 88% did in the fourth quarter. And 2014 is starting out just as dismally; during the first quarter of 2014, 83% of S&P 500 revised their earnings guidance lower.

Why the run-up on the stock market? To compensate for weak results, companies masked their poor earnings and revenues with cost-cutting measures and near-record stock buyback plans.

The U.S. unemployment rate has improved to 6.3%, but the underemployment rate is at an unacceptable 12.3%. On top of that, 46.1 million, or 14.5% of the country, receive food stamps. Further, more and more Americans are in debt; the average credit card debt is $15,191, the average mortgage debt is $154,365, and the average student loan debt is more than $33,000.

Everyone seems to point to the U.S. housing market as the silver lining in the economy, but that’s beginning to tarnish. While U.S. housing prices are up 25% since the beginning of 2012, they still need to increase more than 20% to reach their pre-recession highs.

On top of that, the U.S. housing market is too expensive for most first-time home buyers—the litmus test for how well the American economy is doing—who accounted for around 16% of new home purchases in April, down from a range of 25% to 28% between 2001 and 2007.

As for existing home sales, first-time buyers made up just over a quarter (29%) of purchases; the 30-year average for first-time homebuyers, and a number economists consider healthy, is 40%. What’s worse, homeownership in the U.S. is at its lowest levels in almost 20 years.

Bill HR 2847 will not usher in the end of America on July 1, 2014, but the fate of America at the end of 2014 is a different story altogether. Wall Street is busy cheering record highs on the S&P 500 and Dow Jones. Meanwhile, Main Street is saddled with debt, stagnant wages, high underemployment, and consumer sentiment is shaky at best.

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