New Law: (H.R. 2847) aka FATCA Starts July 1.

A new law will go into effect on July 1, this one—called FATCA--may cause all of us headaches at the very least, and has the potential to blow away whatever minor recovery we have been seeing, even causing the mortgage rates for buying a new home to skyrocket to 15%. FATCA was passed 4 years ago, but was passed with a delayed start date--it's slated to go into effect July 1. It's another one of those laws that Congress had to pass to find out what's in it, so we'll all learn about it together.

 

Stansbury Research, known as a rampant "Chicken Little" has released a white paper indicating that FATCA (also known as H.R. 2847) will lead to the collapse of the American financial system. While at first their "hair on fire" warnings seem pretty harsh, the more you read about this new law, the worse it seems.

The concept of FATCA is to catch Americans thought to be evading taxes by hiding their wealth in foreign bank accounts. The way FATCA does this is by requiring that all non-U.S. financial institutions pass along detailed information about American account holders, or potentially face steep penalties. Doesn't sound like it will affect you and me so far, does it.  And yet, read on.

Casting such a wide net is already producing unintended consequences. Banks around the world are suddenly rejecting Americans as clients or customers, because foreign banks don't want the reporting and bureaucratic hassles, plus the potential exposure to draconian IRS penalties.

One of the under-reported but major risks to the U.S. economy stemming from FATCA is the potential for wide-scale disinvestment from the United States by foreign institutions seeking to avoid the IRS, (related penalties, and huge compliance costs). The 30-percent FATCA "withholding tax' represents a powerful incentive to drive investors out of U.S. markets entirely. The implications for the stock market, bonds, the dollar, and more could be monumental.

There is currently more than $21 trillion of foreign capital invested in American assets and markets, with about $10 trillion of that in our stock market. That could change as FATCA enforcement begins later this year — possibly dramatically. As this money is withdrawn, and foreign institutions start fleeing U.S. markets, the economic damage would be massive — potentially apocalyptic, especially considering the massive U.S. trade deficits and America’s outsized reliance on foreign investment and outside credit just to function.

Stansbury's position is that the dollar has been the defacto international currency, but that kicking foreign investment out of the US will be the straw that breaks the camel's back. And at that point, the dollar will no longer have international standing. Further they believe that absent the right to print money to pay our bills, the dollar would rapidly devalue. You can decide if this is plausable, but if it is...read on.

A rapid devaluation would collapse the stock market by an estimated 40%, and it would drive mortgage rates up to 15%. This would—Sansbury believes—lead to a 25% reduction in the American standard of living.

Multiple reports suggest that small and medium-sized (foreign) firms, unable to bear the compliance costs or the IRS's crippling withholding taxes, would be especially likely to ditch American markets. After all, there are plenty of promising new markets in which to invest.

Even if the decimation of our financial system is not probable, FATCA has been the subject of a number of a number of criticisms which include allegations that the costs of implementing it may outstrip the additional revenues it will bring in, that it may prompt "capital flight" in the form of foreign financial institutions divesting themselves of U.S. assets, and that foreign relations may be strained by the U.S. requiring foreign governments to gather and report (at their own expense) information on U.S. Citizens. The full implementation of FATCA may, as some critics have maintained, ultimately prove more harmful to U.S. business interests and U.S. citizens than its benefits will merit.

Dane Hahn is a real estate professional at Sarasota Realty Associates, serving Sarasota and Charlotte Counties. You can reach him at 941-681-0312 or by email at dane.hahn@gmail.com.