Wednesday, June 01, 2011

The Great Repatriation

Given the current and forthcoming economic weakness, political pressures will manifest themselves into various measures to strengthen domestic demand and combat the (now obvious) deflationary pressures that, if left unchecked, threaten to launch the world's most dynamic economy into a Western Hemisphere version of Japan's "lost decade".

Since monetary policy has been an utter disaster (in the sense that it has failed to do what our leaders thought could be done), more imaginative fiscal policies will be brought forth in an effort to combat deflation.

Chief among these policy options will be a reform of tax policy on foreign earnings. This will consist of two prongs. The first is explicit tax breaks on foreign earnings repatriated back to the United states coupled with an implicit efforts "suggesting" that U.S. multinationals recycle these foreign earnings into domestic investment.

These measures, together with foreign demand for U.S. financial assets (based on my convictions that things in the developed world will continue to erode, the U.S. being the only safe port in the proverbial storm) will successfully combat deflation. The U.S. will not devolve into the Japanese experience.

But risks remain. Policymakers could be convinced of the debt hysteria surrounding economic debate and choose not to follow the above measures, but in my view tax refunds/breaks/rebates on foreign earnings is a wonderful way to stop deflation in its tracks, and something the Fed should consider lobbying congress to explore this option.

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