Is Tax “Reform” Good For The US Dollar? How About Gold?

Let’s investigate what happened after the last 3 major tax reforms. Another “reform” is on deck.

I picked up this idea from Holger Zschaepitz, @Schuldensuehner, who made the following Tweet, posting a chart from Bloomberg.

Proposed US tax overhaul, 3rd major change to US tax code over past 40yrs, will drive the Dollar, but not the way you would expect. Index plummeted 16% in 1986 after Reagan’s reform. After George W. Bush cut taxes on dividends in 2003, the currency slid 15%. (via BBG) pic.twitter.com/hKcFrMCYaH

— Holger Zschaepitz (@Schuldensuehner) December 5, 2017

In the following chart, I add a key piece of legislation that someone inadvertently overlooked.

Tax Reform vs US Dollar 1986-Present

Key Dates

October 22, 1986: Tax Reform Act of 1986

June 7, 2001: Economic Growth and Tax Relief Reconciliation Act of 2001

May 26, 2003: Jobs and Growth Tax Relief Reconciliation Act of 2003

November 16, 2017: House and Senate pass tax “reform”. The bill heads for reconciliation to straighten out differences.

US Dollar Synopsis

Following the 1986 legislation, the dollar about 22% over the next six years.

Following the 2001 legislation and continuing with the 2003 legislation, the dollar fell about 37% over the next seven years.

What’s Next?

The Senate version of the bill is likely to add over $1 trillion to the deficit while not even cutting taxes beyond 2027.

A bill that adds so much to the deficit is not US dollar supportive, to say the least.

However, one cannot view these things in isolation. How the dollar reacts also depends on events in the Eurozone, China, and Japan, as well as Fed interest rate policy.

Global Currency Debasement

Global currency debasement is underway.

Things may be even crazier elsewhere, so a decline in the dollar is not guaranteed.

A Driver for Gold

Sooner or later, competitive currency debasement will matter.