To: Your Nightmare
Certainly the dollar has declined against the Euro, but most of America's foreign trade is with Latin America and the rest of Asia in which the foreign exchange picture is quite different. Euroland, as a whole, has a trade surplus with the rest of the world. This means that there is a shortage of euros relative to dollars in the hands of foreigners. By elementary supply and demand, the euro must appreciate relative to the dollar. But, so what? If the cost of European vacations and French wine increases for Americans, that hurts Europeans more than Americans. Americans can buy Chilean or Australian wine and vacation in Hong Kong or Singapore. The "fallacy" in Buffet's article is not that the dollar is not declining against the Euro, but his blaming this on America's "spendthrift" habits. The trade deficit, as the Capital Flow Watch
article points out, is the result of foreigners willingness to accept dollars as payment for goods and services, not the result of American's savings habits
. The criticism aimed at Mr. Buffet is not that he is not a smart investor, which he obviously is, but rather that he is using a phony argument to justify massive government intervention in commerce.
Foreigners’ willingness to accept dollars as payment for goods and services has indeed been remarkable. And the vast inflow of foreign savings has helped drive U.S. savings down. But the costs for the US are also remarkably high. In my recent book, my coauthors and I explore the costs of the trade deficit, and possible solutions, including the Import Credits idea. The publisher’s website www.idealtaxes.com has two or three sample chapters available for viewing. Just because foreigners (and foreign governments in particular) have seen it to be in their interests to manipulate the terms of trade doesn’t mean that this is a good thing for the U.S. economy.
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