tariffs on Goods may be a Prelude to tariffs on
money what did you say and that’s not a conspiracy theory it’s a headline from a recent article by
the financial times and it’s something that’s apparently been in the works for months taxing
foreign Capital being invested into US assets is an idea that’s been floated by individuals
with close ties to the Trump Administration and it could have profound effects on the markets and
that’s why we’re going to take a look at what is been proposed why it’s been proposed when it could
be implemented how it could affect the markets and the alternative that could be implemented
instead my name is Nick and you’re watching the coin Bureau while the idea of taxing foreign
Capital coming into US assets has been around for decades it wasn’t taken seriously until the summer
of 2019 when a bipartisan bill called the quote competitive dollar for jobs and prosperity Act
was tabled by US senators Tammy Baldwin and Jos Hy according to a 2019 Bloomberg article by Economist
and Professor Michael Pettis quote the tax would aim to reduce Capital inflows until they broadly
match outflows because a country’s capital account must always and exactly match its current account
if the American Capital account is balanced then its current account must also be balanced and the
US trade deficit would effectively disappear in plain English a tax on foreign investments into
US assets would make the economy more balanced by reducing its Reliance on financialization
and increasing actual economic growth uh like manufacturing not sure if you’ve noticed but
this has been one of the areas of focus for the Trump Administration not surprisingly the 2019
Bill to tax foreign investments into US assets and never got off the ground what is surprising
though is that American Compass a think tank with close ties to vice president JD Vance recently
published an article arguing that the 2019 bill should be seriously reconsidered and ideally
passed similarly to the aforementioned Michael Pettis American Compass noted that quote the US
has seen a 10% decline in industrial output and a 35% decline in production manufacturing jobs since
2000 a market access charge would make the foreign investment of US Financial assets more expensive
making the purchase of American exports relatively more attractive this approach would s multaneously
promote us production and industrial strength serve as a source of Revenue and counteract forces
driving the trade deficit in other words you could Revitalize the actual US economy by taxing foreign
investments into US assets American companies advocated for a clever model wherein a tax would
begin at just a half a percentage point but then increase by half a percentage point every 6 months
or every year until the US no longer has a trade deficit the think tank estimates that this could
raise over $2 trillion over a 10-year period and the more you think about it the more it makes
sense in the modern day America’s most valuable export is arguably its capital markets everyone
around the world invests in US assets especially individuals and institutions with lots of money
because the US market is the only one liquid enough for these large investors and this is
significant because this means these big investors can’t really go anywhere else put differently
the US basically has a monopoly on financial assets this has come at the expense of America’s
actual economy but with the right strategy it could be used to support the actual US economy by
essentially taxing wealthy investors overseas and this seems preferable to tariffs on foreign Goods
which run the risk of creating serious issues for us consumers and businesses regardless of their
wealth the only problem is that foreign investors probably wouldn’t be very happy about this tax
and many could sell their us Assets in protest the result would be the US economy entering a deep
recession because its most important industry would effectively go bankrupt before another one
could step in to replace it and by the way guys if this begs the question of why some are advocating
for this tax on foreign investments into US assets obviously the answer is because it’s probably the
best way that the US can rebalance its economy and this begs the bigger question though and that’s
why the US economy became so financialized in the first place the answer is something called
triffin dilemma also known as triffin Paradox first identified by Economist Robert triffin in
the 1960s in short when a country is a issuer of a reserve currency it is eventually forced
to sacrifice its domestic economy to satisfy the foreign demand for its currency I’ll use
an example to explain why as you’ll know the US dollar is the world’s Reserve currency in
Practical terms this means that the dollar is the primary currency for international trade and
if you want to sell something internationally you charge in US Dollars and if you want to buy
you pay in US Dollars logically the fact that you need to have dollars to do International
Trade creates an enormous demand for dollars the Practical effect of this demand is that it
pushes up the value of the dollar relative to other currencies and this is where the associated
problems start to become apparent imagine you’re a US company looking to sell smartphones and let’s
assume that your cost of manufacturing is the same as other companies making smartphones overseas
the the fact that the dollar is stronger because of its reserved currency status will make your
smartphones more expensive compared to the other companies selling the same smartphones overseas
in weaker foreign currencies as a US company the only way you can stay competitive is to lower
your price and this means lowering your profit margins which make you less competitive eventually
you will either go out of business or be acquired by a foreign smartphone company that was able to
grow larger because because its exports were more competitive due to its cheaper currency and this
my friends is the story of American Manufacturing in a nutshell of course there is a financial side
to this story too if the value of the dollar Rises too much relative to other currencies it starts to
create issues for other countries and eventually for the global economy there’s only one way to
minimize the effects of Demand on price and that’s to increase the supply and this is precise what
the US government has been doing with the helps of the Federal Reserve it’s been increasing the
supply of dollars for decades while it’s true that most of this money printing happened in response
to financial crises most of these Financial crises fundamentally had the same thing in common they
were the result of a shortage of US Dollars and or dollar denominated collateral as you’ll
probably know the exponential increase in the supply of dollars is why everything has become
exponentially more expensive Ive over the last few decades what you may not know though is that
foreign countries have been printing currencies too and that’s to ensure the dollar isn’t too weak
whereas a strong dollar can create problems for the international economy a weak dollar can create
problems for the American economy such as making Imports more expensive it also causes inflation
to rise primarily because of how a weak dollar affects Energy prices a weaker dollar makes oil
more affordable globally which results in more oil consumption raising the price of energy
everywhere and this ladies and gentlemen is why it’s referred to as trin’s dilemma being the
issuer of a reserve currency means that you must ensure your currency is not too weak but also not
too strong this ultimately involves hollowing out your domestic economy and printing large amounts
of money which creates growing wealth inequality and all the other issues that are top of mind
for Americans today oh sorry I just had to take in theory the only way to ensure that the
dollar doesn’t become too strong is to increase its Supply which inevitably leads to inflation in
practice however there’s another way and that’s to reduce the demand for dollars without hurting its
Reserve currency status in case it wasn’t clear enough this is practically what a tax on foreign
investments into US assets would do and that’s why the very first line of that 2019 Bill reads
quote to establish a national goal and mechanism to achieve a trade balancing exchange rate for the
United States dollar taxing foreign investments into US assets is actually a means to an end and
that end is to manage the Dollar’s value for those unaware if you want to invest into US assets you
first need to buy US Dollars logically the fact that you need to have dollars to invest in US
assets creates an enormous demand for dollars just like with International Trade the difference
is that this dollar demand isn’t productive it’s not going towards global economic activity it
just creates extra demand for US dollars in turn this has made the actual US economy extra
uncompetitive and has put extra pressure on the US government and the FED to print more dollars to
make sure that the dollar doesn’t get too strong as explained earlier in this sense it’s not the
financialization that’s the problem it’s the extra demand for dollars that it creates and the extra
negative side effects that this has on the US economy taxing foreign investments into US assets
would therefore not only reduce trade deficits and raise the capital required to rebuild the actual
US economy but it would also simultaneously address the cause of the problem the extra demand
that us assets are creating for dollars and its negative side effects the best part is that this
is something that could work simply because there aren’t many other places that this foreign Capital
could go as I explained earlier the US basically has a monopoly on financial markets and this
means that investors especially large foreign investors would likely pay this tax to put things
into perspective the US Stock Market accounts for more than 40% of the global stock market Europe
and China come in second and third with only around 10% each in theory foreign Capital could
go into European and Chinese stock markets and we have seen these kinds of flows in recent weeks
in practice however you need more than a big stock market to compete with us markets for starters
you need to have strong property rights and robust Securities laws China is known for neglect in the
former and many would argue that Europe’s seizure of Russian assets after it invaded Ukraine in
2022 has called into question how much property rights are present in the European markets say
what you will about the us but but it also has the strongest property rights and securities
laws of any Market the US also has the largest and most liquid bond market which is another
requirement to compete with us markets uh for those unfamiliar wealthy investors typically don’t
ape into risk assets like stocks they prefer to invest in safer assets preferably assets that earn
a yield to offset the erosion of inflation and this usually means bonds specifically Sovereign
bonds AKA a government debt which offers a safe yield so suppose you’re a wealthy investor with
tens of billions of dollars sure some of that money will probably go into stocks but most of
it will probably go into government bonds or similar instruments would you feel comfortable
holding tens of billions of dollars of Chinese government debt given the geopolitical trends
chances are you’d prefer to keep that money in US Government debt even with the tax but let’s say
you really don’t want to invest in US Government debt uh the only other large and liquid sovereign
bond market can be found in Europe but they’re not very large or liquid because each EU country
has its own bond market chances are you’d prefer to keep your money in German government debt
but if everyone has the same idea the yields would be very high it just wouldn’t be worth
it as such you could say that foreign investors not only require large and liquid stock markets
to invest and speculate in but also a large and liquid bond market where they can keep their dry
powder safe for the time being the US is the only jurisdiction that offers both and it looks like
this will be the case for the foreseeable future and this means that the US should be able to tax
foreign investments without affecting much but what if I told you that the US didn’t need to tax
foreign investments to reduce the excess dollar demand these Financial inflows create and this
is where things get truly fascinating to recap the motivation behind taxing foreign investments
into US assets is to raise Capital to offset the effects of being the world’s Reserve currency and
address the root cause which is global demand for the dollar although some of this demand cannot
and should not be reduced like International Trade US dollar demand from Investments can
and should be reduced but what if there was a way to invest in US assets without having to buy
dollars believe it or not but this could be done by tokenizing assets for context tokenized assets
on digital assets backed by so-called realworld assets including stocks and bonds and issued on a
blockchain be it public or private there are many benefits to asset tokenization including lower
fees faster settlement and 24/7 trading however there is another benefit that nobody has been
mentioning probably because it’s not so obvious most tokenized assets are likely to trade against
against stable coins be they public or private for reference stable coins are digital assets pegged
to Fiat currencies usually the dollar the catch is that stable coins are not backed by dollars
they’re backed by us bonds I.E US Government debt so if us assets get tokenized and most of them end
up trading against dollar stable coins this won’t create extra demand for dollars it will create
extra demand for us bonds instead FYI a currency strength partially depends on interest rates and
interest rates mostly depend on bond yields bond yields depend on the price of the bond and the
price of the bond depends on supply and demand the greater the demand for a bond the higher
the price and the lower the yield the lower the yield translates to lower interest rates which
translates to a weaker currency all else being equal news flash but this means that tokenizing
us assets and having them trade mostly against stable coins would kill two birds with one stone
Not only would it Ed dollar demand associated with us assets but it would also increase the demand
for US Government debt lowering interest rates and further weakening the dollar this would be a
win-win for the US economy and the US government in case you miss the news Black Rock has been
pressuring the SEC to approve the tokenization of more stocks and bonds meanwhile Mega Banks like
Bank of America are planning on launching stable coins everyone assumes that these institutional
stable Co coins will be used for payments but it’s likely they will be used mostly to trade
tokenized real world assets just like they’re used mostly to trade cryptos Not only would this
eliminate the need for taxing foreign investments into US assets but it would also ensure that us
markets remain dominant globally and could even increase their dominance and this would make it
possible to use these growing financial markets to support the US economy even more and this
brings me to big question and that’s what a tax on foreign investments into US assets would
mean for the markets you’ll probably already know the answer if you were paying close attention it
would be unlikely to affect the markets in any meaningful way because there is nowhere else for
large investors to go make no mistake there would likely be some minor redirection of capital around
the margins even though this minor redirection of capital wouldn’t affect us markets much it
would have profound effects on foreign markets just because they’re much less liquid and that
means it takes less money to move the prices of their respective assets and this could result in
speculative bubbles in overseas markets the caveat is that the composition of major US Stock indices
could cause us markets to fall in the short term which is kind of what we’ve seen in recent weeks
you see stock indices like the S&P 500 are waited by market cap meaning that the bigger a company
gets the more inflows it will receive as some of you will know just seven tech stocks account
for over a third of the S&P 500 the consequence is that these so-called Magnificent Seven stocks
have become the most widely held stocks globally so when foreign investors go to sell those
Magnificent Seven stocks the outcome is that the entire S&P 500 Falls even though most of the other
stocks in their index are completely fine however this all assumes that the Trump Administration
would go as far as taxing foreign inflows into US assets even though this has been actively
discussed by entities adjacent to the Trump Administration it hasn’t been formally proposed
or hinted at by anyone in the administration yet it goes without saying that taxing foreign inflows
into US assets would be a last resort of sorts but it’s safe to say that Trump’s foreign policies
around things like tariffs haven’t really been very predictable it’s quite possible that we could
see taxes on foreign investments proposed sometime later in the year when the markets have digested
the current tariff tantrum but again this would probably be a last resort however changing the
structure of us financial markets through asset tokenization seems to be an objectively better
approach to achieving the same policy objectives and it’s one that seems to be in full swing the
catch is that it’s going to take time to digiti ize the US financial markets it could take
years if not more and this means it could be years before the positive effects of this new
Financial system start to feed into the actual economy and something could go horribly wrong
in the interim there could be a major technical issue with tokenized assets for instance and
that would likely reduce investor confidence in US markets more importantly there would be an
issue with the US bond market uh to bring you up to speed the US government hit its debt sealing
in January this year and US politicians are in the process of passing a quote big beautiful bill that
includes a provision to raise the debt cealing if this spending bll does not get passed before
the US government runs out of money it could risk causing a bond market crisis and this would
reduce investor confidence in US markets and it would be a huge blow to that critical element that
large foreign investors look for safe and liquid Bond markets and if wondering how much money the
US government has left you can see this by looking at the balance of the treasury general account on
the Federal Reserve website as you can see there’s currently around $500 billion left to spend and
more money will come in from taxes in April this means that the US government could run out of
money sometime over the summer if the debt ceiling isn’t raised by then it stands to reason that the
Trump Administration would probably not be able to tax inflows on foreign Capital if there’s
a bond bond market crisis that causes foreign investors to flee as such you could say a bond
market crisis is the biggest risk to the markets above and beyond the tariffs and that’s because a
bond market crisis would destroy confidence in US markets whereas tariffs just destroy confidence
in the US economy as horrible as it sounds uh the fact of the matter is that markets are more
important than the economy at this stage because they’re necessary to get the economy back on
track if anything happens that causes faith in the US markets to fall it will not be possible to
leverage them as a means of improving the actual economy come to think of it this is why some
foreign investors have started selling us assets they know that this will hurt the US’s prospects
of recovery the most thankfully there’s nowhere else that this Capital can really flow for now
but the clock is ticking and if you want to know what Trump’s tariffs could mean for the economy
in the interim be sure to check out our video right over here and if you’re not subscribed to
the channel yet you can do that right over here that’s it for our video today thank you very
much for watching and I’ll see you next time
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