|
Don't want to sound alarmist or anything, but with the recent news of another interest rate cut coming that would bring the nominal interest rate to the lowest level ever, you got to wonder, what will be the greater disincentive in the coming years for small businesses, or for all businesses for that matter: tax rates or inflation/currency debasement?
Pretend that you are the CEO of Dell. And with the recent slowdown in the US, you are trying to diversify your sales around the world. You look out the window, and there's Ben Bernanke dropping straps of cash from his helicopter, because that's what he's essentially trying to do, expanding the money supply to drive up consumption. You gotta be thinking to yourself, what's going to happen to IBM if my corporate profits in the dollar take a beating from inflationary pressures, which will restrict my ability to make capital investments abroad in the coming years?
What's going to happen is that Dell would engage in the practice of price transferring. Dell is going to assemble its laptops in the US and 'sell' them to its subsidiary in China at a price that is very close to the real cost, say $50. But once the laptop gets to the subsidiary distributor in China, the subsidiary will sell for the market price of around $100 throughout Asia. So in essence, the $50 margin is realized in the Yuan, as opposed to the dollar, because of the expectation that the dollar will decline in the intermediate future. The consequences would be very clear: tax revenues from Dell would be going to the communist party, rather than the IRS, even though the tax policy in the US may become more favorable in the coming years.
Can you really blame Dell if they decided to hedge their currency risk this way? After all, it's Bernanke and Paulson trying to print and borrow money like crazy to save everybody.
|