MONETARY POLICIES
crisis will at least offset some of the tax gain, perhaps eventually completely offsetting it.
Tird, although the administration will make many claims about how the tax reform will benefit e v e r y bod y , the fact is we simply don’t know what will happen. For the corporate sector, who seem to be quite large beneficiaries, it is hoped that companies will take the extra dollars they have available, and invest in new plant and e q u ipm e n t and create more jobs for Ame ri c a n s . This may well happen, however, we cannot assume this is a safe assumption as we
need to understand the incentives involved here.
We have been working with the assumption for the last two decades, that corporate America (especially the large quoted
sector) have the wrong incentive structure. American executives’ compensation
is dominated by
share options, and obviously the incentive is therefore to get the
FX
profit potential, quoted American companies have become much more focused on financial engineering. All
too often, management
Nobody knows what effect the tax proposals will have on the economy. The likelihood is that the plan will simply increase the Federal Government deficit
share price as high as possible. Although this seems to align management and shareholders interests, we do not think that all stakeholders are aligned.
Rather than invest in new plant, equipment and worker training to try and boost their long term
choose to buy back shares rather than increase i n v es t me n t, so met i mes increasing debt to do so. All too often when profits look to be falling short of estimates, companies will announce mass layoffs. And often, rather than investing for growth, companies will acquire growth through mergers and acquisitions. S o met i mes, companies do all of these at the same time.
So, if companies suddenly find themselves with
more free cash available, will they invest and create jobs? Or will
they simply engage in more
financial engineering which may actually cost jobs? Even if they choose the invest and create jobs route, the US economic cycle is looking increasingly mature, and not in need of a massive fiscal
FX TRADER MAGAZINE October - December 2017 41
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