Iran, scarry. Oil scarry. Iraq scarry.
Well you know what let me throw, our deficit is series.
Put it all together, will the dollar go up or down?
Posted on 01/18/2006 5:31:00 AM PST by Flavius
RENO, Nev. - The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to "political turmoil," billionaire investor Warren Buffett warned. ADVERTISEMENT
"Right now, the rest of the world owns $3 trillion more of us than we own of them," Buffett told business students and faculty Tuesday at the University of Nevada, Reno. "In my view, it will create political turmoil at some point. ... Pretty soon, I think there will be a big adjustment," he said without elaborating.
Buffett, head of Omaha, Neb.-based Berkshire Hathaway Inc., was in Reno for the opening of the company's R.C. Willey Home Furnishings store.
He spoke the same day Berkshire Hathaway disclosed its purchase of Business Wire, a privately held distributor of press releases, for an undisclosed amount.
San Francisco-based Business Wire will operate as a wholly owned subsidiary of Berkshire Hathaway, whose other holdings include the insurer Geico Corp. as well as stakes in American Express Co., Anheuser-Busch Cos. and The Coca-Cola Co. Business Wire competes with PR Newswire to distribute company regulatory filings and press releases to investors and the news media.
The U.S. trade deficit soared to a record $665.9 billion in 2004, and Buffett said he expects it to top $700 billion this year.
"That's $2 billion a day. We are like a super rich family that owns a farm the size of Texas. You sell off a little bit of the farm and you don't see it," he said.
Fifteen years ago, the U.S. had no trade deficit with China, he said.
"Now it's $200 billion. If we don't change the course, the rest of the world could own $15 trillion of us. That's pretty substantial. That's equal to the value of all American stock," Buffett said.
"That's the big danger. Our national debt does not bother me. Our public debt is not at a crazy level," he said.
Meanwhile, Buffett said U.S. companies generally are enjoying some of their best times ever.
"Profits are at close to record levels. So business in America is doing very well — better than its lower-paid workers, by some margin," he said.
"This is a pro-business United States. If you get a group of businessmen together they'll complain about regulation and liability suits, all kinds of things. Some of those things they are right about and some of it they are just complaining to complain," he said.
U.S. corporations seem to be acting more ethically in the wake of scandals at Enron and elsewhere, but that' primarily due to bad publicity rather than new federal checks and balances, he said.
"I think corporate American to a fair degree has cleaned up its act," he said. "The press has probably contributed very significantly to that. I think managers are behaving better because of fear rather than just becoming better managers."
Buffett said students will have to decide personally whether a master's in business administration will benefit their careers or if they'd be better off plunging into the real world.
"The one piece of advice I can give you is, do what turns you on," he said. "Do something that if you had all the money in the world, you'd still be doing it. You've got to have a reason to jump out of bed in the morning."
Iran, scarry. Oil scarry. Iraq scarry.
Well you know what let me throw, our deficit is series.
Put it all together, will the dollar go up or down?
Buffet is a shrewd investor, not an economics expert.
Buffett is also a Demonrat who has been predicting doom and gloom since Bush took office. This is his part to create an issue for the Demonrats to run on in the elections this year. Schmuck.
Buffett Boy lost big recently on assuming a continued decline of the dollar. Warren is no genius. You put a million monkeys in a room throwing darts at the stock quotes pages and one of those monkeys would "pick" as well as Warren.
Buffet has lost one billion dollars shorting the dollar the last time I checked. Here's hoping the jackass loses much much more in betting against America!
All the more reason to ignore him.
We could probably cut the trade deficit in half if we stopped importing oil. Think of the positive effect that would have on our economy, Mr. Buffett.
Geez, Louise.
I wish Buffett would stay out of economics and just keep writing those great Parrotthead tunes. ;>)
He has the dollar short.....do you think he has a dog in this fight...he needs the dollar down to make HIS money...
Where was it you checked on Warren Buffett's holdings and his investment model.
my last report from Berkshire Hathaway....that I purchased in 1985
QUESTION - How does such an unstable currency help citizens?
Should our children be proud that theirs is the largest creditor nation on Earth, while earning a hard currency with continually rising international buying power - - as it was when we were their age?
Or, be proud of today's reality > > being the largest debtor nation on earth and earning a weak currancy, with a long-term erosion in international buying power of 72%.
Based on exploding trade deficits and debts, is the US dollar threatened to repeat past long-term declines?
And looking forward, does the European currency (the Euro), issued in Jan. 2002, pose a future threat to the dollar, and therefore to relative U.S. living standards and national security?
Does the Yen also threaten, considering Japan's positive trade balances and strong internal savings vs. horrendous negative balances in the U.S.?
The dramatic negative trends of the U.S dollar vs. the currencies of several industrial trading partners - - a drop up to 74% in the dollar's international buying power - past 35 years.
In the past several years there has been an up-tick - - only time will show if it is sustainable. Note 2002-2004 down-tick.
During these 33 years Americans became more consumptive spending, more debt-dependent and less savings-oriented. In order to support that addiction the international value of our currency declined dramatically over the period, due to soaring negative trade balances.
Many times during this period U.S. government officials allowed (even encouraged) actions helping cause this situation, believing a weak dollar would turn trade deficits into surpluses. They were actually engaged in competitive devaluation of the currency we pay our workers. They were wrong, and negative trade balances exploded and the U.S. manufacturing base faltered. Finally, starting in 1997, Treasury officials voiced (vocal, only) support for a strong dollar which, together with uncertainty concerning changes in the European Union and its new currency (the Euro) and Asian currencies, helped the dollar recover a bit from years of decline (see chart).
But history proves that just a couple years upside does not assure future strength and buying power stability, unless negative trade balances are reversed.
In fact, although the dollar experienced an up-tick in the past several years U.S. trade deficits still soared to even new all-time unsustainable records each year - - as shown in the International Trade Report graphics - - and the new Euro currency started to circulate January 2002.
This shows the U.S. must do more than 'talk-up' the dollar and play change the measurement criteria with statistical wizardry for GDP, inflation and productivity to make the economy appear better than it is, but the nation must reverse its trade imbalances, reduce soaring private sector debt ratios, and reverse negative private savings ratios strong to the upside. So far there is no evidence of such.
By the way: the period of declining dollar values shown in the graphic's first 25 years was the same period of stagnant and falling U.S. median family incomes (adjusted for inflation) and savings, as reported in the Grandfather Family Income Report, declining education productivity & quality, declining productivity, soaring social spending and soaring government debt ratios.
And, this period was preceded by government spending growing much faster than the total economy, steadily reducing the share of the private sector, as government mandated regulatory cost ratios climbed. America became less strong and less competitive.
The long-term performance of our currency is our fault (negative trade balances and soaring private sector debt with zero savings).
It should be unacceptable to pass to our young an economy, which not only provides stagnant real family earning power and a difficult living standard in dollars, but a currency with a long-term history of devaluation in its international store of value, against children of other major developed nations.
We will feel increasingly poor when traveling in the world outside America because of our currency, compared to the experience of prior generations. Several generations ago, the U.S. dollar was king, and the one who earned dollars felt like a king when he traveled. No longer.
the fall of the dollar coincides with high oil prices and the US becoming a net oil importer-dating from the 1970's
imho the US is only a couple years from some major league technological innovations that will drop the role of foreign oil in the US economy.
as well I think that we are in a golden age for math because of computers that will keep productivity in the 3+% range for the next couple decades.
Do you mean annual report? If so it must be much more detail than any I receive.
It's been in several articles I've read on FR. Every so often he comes out with a swipe at America, but it never seems to help his shorting problem.
Half a billion in this article, but I've read where it's a billion + recently.
Bearish on Buffett
By Brian S. Wesbury
Published 8/29/2005 12:06:31 AM
This article appears in the July/August issue of The American Spectator. To subscribe, please click here.
WARREN BUFFET IS BEARISH on the United States, and he's bullish on Europe. For the first time in his life, starting in 2002, Mr. Buffett entered the foreign exchange markets and shorted the dollar. This rare macro-economic bet was based on a belief that U.S. consumers and the U.S. government were spending beyond their means, and that the trade deficit was a sign of economic weakness.
While his short position was profitable in 2004, he has lost more than half a billion dollars so far in 2005. Some Wall Street sources suggest that his breakeven exchange rate is $1.22/euro, so with the euro trading near $1.21 in mid-June, his short position was seriously in the red.
Buffett's anti-American investment sentiment has cost Berkshire Hathaway shareholders dearly. During the 12 months ending in mid-June, his stock price was down roughly 7 percent, while the S&P 500 was up 5 percent. The stock market voted "non" on this Berkshire investment strategy, just like the French and Dutch voted against the European constitution.
And, of course, these two developments are inextricably linked. The French voted against the constitution because they are afraid it will force them to give up their 35-hour workweek and generous social welfare system. This system forces French taxpayers to support an unemployed contingent that has reached 10 percent of the labor force.
It's hard to figure out why Warren Buffett is so down on the U.S. economy and so enthusiastic about Europe's. But gloom and doom forecasts about the U.S. economy are a dime-a-dozen these days. It's as if we rolled back the clock 20 years and it's the early 1980s all over again.
Then, it was President Reagan's tough stance against Communism, large budget deficits, growing trade deficits, Germany, and Japan that were bothering so many pundits. Today, it is President Bush's tough stance against terrorism, trade and budget deficits, China, and India that stir fear in the hearts of the doomsters.
The gloom and doom of the early 1980s proved to be nonsense, just as the current pessimism will prove wrong as well. Corporate profits have climbed to an all-time record high, the U.S. stock market is more undervalued than it has ever been, and the unemployment rate has fallen back to 5.1 percent.
Despite all this good news, pessimists took refuge in the belief that U.S. consumers were spending beyond their means. The data supported this view. Personal consumption in the U.S. climbed 6.3 percent during the year ending in March, while wages and salaries only climbed 5.7 percent. This divergence was enough to test even the most bullish forecaster.
BUT SOMETHING INTERESTING happened in May. The Bureau of Labor Statistics revised income statistics over the past year. New data show that wages and salaries actually climbed 7.5 percent, not 5.7 percent. This is a massive revision. It changes the entire picture. With the flick of a statistician's pen, a big part of the doom-and-gloom story evaporated. Incomes have grown faster than spending, not the other way around.
These revisions have become commonplace as the U.S. economy becomes more difficult to measure. The government's statistical machinery was designed in an industrial era of large enterprises, time clocks, and paternalistic corporations. Today's economy has more small companies and self-employed entrepreneurs. Decentralization makes it harder to gather accurate measurements.
As a result, it is not for months (and sometimes years) after the fact that full information is available. In order to accurately gauge incomes, the statisticians in Washington must wait for data from the state unemployment insurance systems. New small business start-ups eventually show up on state records even if they are missed by federal statistics. And when they are finally counted, the revisions are usually positive.
The upwardly revised income statistics solve another riddle. Individual income tax revenues have grown much faster than incomes. Through May 2005 total tax revenue rose 14 percent from the same time period in 2004. Because people do not pay taxes on incomes they do not earn, the surge in tax revenues suggests that the underlying U.S. economy is much stronger than the pessimists believe.
This cannot be said for "Old Europe." Average GDP growth has been less than half that of the U.S., while unemployment is almost double. As a percentage of GDP, budget deficits in Old Europe are larger than those in the U.S. It is these countries, not the U.S., that are profligate with spending and stingy with investment. Old Europe is slowly decaying as global competition undermines the ability of insular social welfare states to maintain the status quo.
New Europe, especially the former Soviet bloc and Ireland, are fierce competitors, willing to embrace the entrepreneurial spirit of capitalism. It is the French who want to cling to the centralized social welfare system rather than adopt the more uncertain, but certainly more successful, decentralized free-market system.
This is not what many had hoped. Conventional wisdom argued that a single European currency would force countries to move toward lower tax rates and freer capital markets. Now, some are suggesting that the failure of the constitutional votes will lead to a collapse of the euro system, and with it the pressures on the whining socialists in Europe to reform. I am not willing to go so far. Eventually, even Old Europe will be forced to change, but it won't happen fast. I suspect the euro will survive and that New Europe will continue to lead the way.
ALL OF THIS BEGS A QUESTION: Why was the dollar so weak in the early 2000s? Because the U.S. economy was weak, or somehow unstable? Or was it that consumers and government were spending beyond their means? None of the above is the answer.
The U.S. dollar was weak as a result of an excessively accommodative monetary policy. The Fed cut the federal funds rate eleven times in 2001 and pushed it down to 1 percent by 2003. And despite a series of rate hikes, the federal funds rate has been below inflation for over two years -- the longest period since the mid-1970s.
In order to hold interest rates below inflation, the Fed has forced liquidity into the economy to such an extent that it caused a drop in the value of the dollar. As in any other market, supply and demand are the dominant forces affecting the value of the dollar. The Fed has supplied more dollars than the world demanded, and the dollar dropped.
Now that the Fed is boosting interest rates, monetary policy is slowly moving back toward neutral. As this occurs the dollar will strengthen. A strong U.S. economy will help this adjustment process as well.
Being short, the dollar in this environment is not a great investment strategy. Warren Buffett should just say "non." The French already have.
Buffett isn't stupid, He's spent the last 6 months positioning himself to be short on everything. He stands to make billions (like George Soros) talking the dollar down. [xcamel]
I wouldn't put it past a shrewd investor like Buffet to be trying to manipulate a market. Who would have the stones to investigate him? [Thebaddog]
He has the dollar short.....do you think he has a dog in this fight...he needs the dollar down to make HIS money... [Youngman442002]
As Buffett says in the following quote, "Berkshire’s resources remain heavily concentrated in dollar-based assets" and a strong dollar is to his advantage. If the dollar goes down, he will only lose less than he would have otherwise. Hence, the foreign-exchange contracts are simply partial insurance against a weak dollar. In any case, following is his quote from page 21 of Berkshire's 2004 Annual Report:
We hope the U.S. adopts policies that will quickly and substantially reduce the current-account deficit. True, a prompt solution would likely cause Berkshire to record losses on its foreign-exchange contracts. But Berkshire’s resources remain heavily concentrated in dollar-based assets, and both a strong dollar and a low-inflation environment are very much in our interest.
While his short position was profitable in 2004, he has lost more than half a billion dollars so far in 2005. Some Wall Street sources suggest that his breakeven exchange rate is $1.22/euro, so with the euro trading near $1.21 in mid-June, his short position was seriously in the red.
The author of the article fails to mention that Buffett is over 2 billion dollars ahead since be began shorting the dollar. Following is an excerpt from page 23 of Berkshire's 2005 Third Quarter Report:
During the first nine months of 2005, the value of most foreign currencies decreased relative to the U.S. dollar. Thus, forward contracts produced pre-tax losses in 2005 of $897 million for the first nine months. Correspondingly, over the first nine months of 2004, the value of many foreign currencies rose relative to the U.S. dollar, and Berkshire’s contract positions produced a pre-tax gain of $207 million. Berkshire first began “shorting” the U.S. dollar in 2002 and since inception in 2002 through September 30, 2005, has recognized pre-tax gains of $2.1 billion from foreign currency forward contracts.
Following is an annual breakout, including data from page 41 of Berkshire's 2004 Annual Report:
Berkshire Hathaway investment gains (losses) from Foreign currency forward contracts (in $millions) 2002................. 297 2003................. 825 2004................. 1839 2005 (1st 3 quarters) -897 --------------------- ---- TOTAL................ 2064
bttt
"Buffett Boy lost big recently on assuming a continued decline of the dollar."
Thank you for supporting my claim above of recent big losses for Buffett on the dollar. Per your chart, Warren "Monkeyboy" Buffett lost $897,000,000 in 2005. You rock!!!!!! You are my new research boy!!!!
The article does mention that "starting in 2002, Mr. Buffett entered the foreign exchange markets and shorted the dollar". But it does not mention his profits over the last several years. Its only mention of profits is the following:
While his short position was profitable in 2004, he has lost more than half a billion dollars so far in 2005.
Later on it states:
Buffett's anti-American investment sentiment has cost Berkshire Hathaway shareholders dearly.
One would never guess from this story that Buffett is AHEAD by over $2 billion. I wish that all of my investments cost me so dearly!
The article also explains why he made money early on, and why he's taking a beating now. Here's hoping the "betting against America jackass" loses his shirt by continuing to short the dollar.
I assume that you hope the same for everyone who "bets against America" by buying foreign stocks. They are likewise diversifying their portfolios and hedging their exposure to the dollar.
Thank you for supporting my claim above of recent big losses for Buffett on the dollar. Per your chart, Warren "Monkeyboy" Buffett lost $897,000,000 in 2005. You rock!!!!!! You are my new research boy!!!!
I charge quite a bit to do private research. Hence, you might want to just keep making up your numbers. ;)
Posted on 01/07/2004 11:35:03 PM EST by dennisw
By Warren E. Buffett, FORTUNE
I'm about to deliver a warning regarding the U.S. trade deficit and also suggest a remedy for the problem. But first I need to mention two reasons you might want to be skeptical about what I say. To begin, my forecasting record with respect to macroeconomics is far from inspiring. For example, over the past two decades I was excessively fearful of inflation. More to the point at hand, I started way back in 1987 to publicly worry about our mounting trade deficits -- and, as you know, we've not only survived but also thrived. So on the trade front, score at least one "wolf" for me. Nevertheless, I am crying wolf again and this time backing it with Berkshire Hathaway's money. Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in -- and today holds -- several currencies. I won't give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline.
Both as an American and as an investor, I actually hope these commitments prove to be a mistake. Any profits Berkshire might make from currency trading would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar.
But as head of Berkshire Hathaway, I am in charge of investing its money in ways that make sense. And my reason for finally putting my money where my mouth has been so long is that our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate.
A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that's how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.
Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.
The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there's a quid pro quo -- but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).
Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off -- or simply service -- the debt they're piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.
Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.
At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat -- they have nothing left to trade -- but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.
It can be argued, of course, that the present value of the future production that Squanderville must forever ship to Thriftville only equates to the production Thriftville initially gave up and that therefore both have received a fair deal. But since one generation of Squanders gets the free ride and future generations pay in perpetuity for it, there are -- in economist talk -- some pretty dramatic "intergenerational inequities."
Let's think of it in terms of a family: Imagine that I, Warren Buffett, can get the suppliers of all that I consume in my lifetime to take Buffett family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffett family unit and its creditors. But the generations of Buffetts following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welsh on it).
Think again about those islands: Sooner or later the Squanderville government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies -- that is, issue more Squanderbucks to dilute the value of each. After all, the government would reason, those irritating Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value. In short, making Squanderbucks less valuable would ease the island's fiscal pain.
That prospect is why I, were I a resident of Thriftville, would opt for direct ownership of Squanderville land rather than bonds of the island's government. Most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold. Theft by stealth is preferred to theft by force.
So what does all this island hopping have to do with the U.S.? Simply put, after World War II and up until the early 1970s we operated in the industrious Thriftville style, regularly selling more abroad than we purchased. We concurrently invested our surplus abroad, with the result that our net investment -- that is, our holdings of foreign assets less foreign holdings of U.S. assets -- increased (under methodology, since revised, that the government was then using) from $37 billion in 1950 to $68 billion in 1970. In those days, to sum up, our country's "net worth," viewed in totality, consisted of all the wealth within our borders plus a modest portion of the wealth in the rest of the world.
Additionally, because the U.S. was in a net ownership position with respect to the rest of the world, we realized net investment income that, piled on top of our trade surplus, became a second source of investable funds. Our fiscal situation was thus similar to that of an individual who was both saving some of his salary and reinvesting the dividends from his existing nest egg.
In the late 1970s the trade situation reversed, producing deficits that initially ran about 1 percent of GDP. That was hardly serious, particularly because net investment income remained positive. Indeed, with the power of compound interest working for us, our net ownership balance hit its high in 1980 at $360 billion.
Since then, however, it's been all downhill, with the pace of decline rapidly accelerating in the past five years. Our annual trade deficit now exceeds 4 percent of GDP. Equally ominous, the rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. Some of this $2.5 trillion is invested in claim checks -- U.S. bonds, both governmental and private -- and some in such assets as property and equity securities.
In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent more than we produce -- that's the trade deficit -- we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.
To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth. Those comparisons show that what's already been transferred abroad is meaningful -- in the area, for example, of 5 percent of our national wealth.
More important, however, is that foreign ownership of our assets will grow at about $500 billion per year at the present trade-deficit level, which means that the deficit will be adding about one percentage point annually to foreigners' net ownership of our national wealth. As that ownership grows, so will the annual net investment income flowing out of this country. That will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them, as in the past. We have entered the world of negative compounding -- goodbye pleasure, hello pain.
We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits. At a point, so it was claimed, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders. And that's the way it has indeed worked for the rest of the world, as we can see by the abrupt shutoffs of credit that many profligate nations have suffered in recent decades.
The U.S., however, enjoys special status. In effect, we can behave today as we wish because our past financial behavior was so exemplary -- and because we are so rich. Neither our capacity nor our intention to pay is questioned, and we continue to have a mountain of desirable assets to trade for consumables. In other words, our national credit card allows us to charge truly breathtaking amounts. But that card's credit line is not limitless.
The time to halt this trading of assets for consumables is now, and I have a plan to suggest for getting it done. My remedy may sound gimmicky, and in truth it is a tariff called by another name. But this is a tariff that retains most free-market virtues, neither protecting specific industries nor punishing specific countries nor encouraging trade wars. This plan would increase our exports and might well lead to increased overall world trade. And it would balance our books without there being a significant decline in the value of the dollar, which I believe is otherwise almost certain to occur.
We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties -- either exporters abroad or importers here -- wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.
Because our exports total about $80 billion a month, ICs would be issued in huge, equivalent quantities -- that is, 80 billion certificates a month -- and would surely trade in an exceptionally liquid market. Competition would then determine who among those parties wanting to sell to us would buy the certificates and how much they would pay. (I visualize that the certificates would be issued with a short life, possibly of six months, so that speculators would be discouraged from accumulating them.)
For illustrative purposes, let's postulate that each IC would sell for 10 cents -- that is, 10 cents per dollar of exports behind them. Other things being equal, this amount would mean a U.S. producer could realize 10 percent more by selling his goods in the export market than by selling them domestically, with the extra 10 percent coming from his sales of ICs.
In my opinion, many exporters would view this as a reduction in cost, one that would let them cut the prices of their products in international markets. Commodity-type products would particularly encourage this kind of behavior. If aluminum, for example, was selling for 66 cents per pound domestically and ICs were worth 10 percent, domestic aluminum producers could sell for about 60 cents per pound (plus transportation costs) in foreign markets and still earn normal margins. In this scenario, the output of the U.S. would become significantly more competitive and exports would expand. Along the way, the number of jobs would grow.
Foreigners selling to us, of course, would face tougher economics. But that's a problem they're up against no matter what trade "solution" is adopted -- and make no mistake, a solution must come. (As Herb Stein said, "If something cannot go on forever, it will stop.") In one way the IC approach would give countries selling to us great flexibility, since the plan does not penalize any specific industry or product. In the end, the free market would determine what would be sold in the U.S. and who would sell it. The ICs would determine only the aggregate dollar volume of what was sold.
To see what would happen to imports, let's look at a car now entering the U.S. at a cost to the importer of $20,000. Under the new plan and the assumption that ICs sell for 10 percent, the importer's cost would rise to $22,000. If demand for the car was exceptionally strong, the importer might manage to pass all of this on to the American consumer. In the usual case, however, competitive forces would take hold, requiring the foreign manufacturer to absorb some, if not all, of the $2,000 IC cost.
There is no free lunch in the IC plan: It would have certain serious negative consequences for U.S. citizens. Prices of most imported products would increase, and so would the prices of certain competitive products manufactured domestically. The cost of the ICs, either in whole or in part, would therefore typically act as a tax on consumers.
That is a serious drawback. But there would be drawbacks also to the dollar continuing to lose value or to our increasing tariffs on specific products or instituting quotas on them -- courses of action that in my opinion offer a smaller chance of success. Above all, the pain of higher prices on goods imported today dims beside the pain we will eventually suffer if we drift along and trade away ever larger portions of our country's net worth.
I believe that ICs would produce, rather promptly, a U.S. trade equilibrium well above present export levels but below present import levels. The certificates would moderately aid all our industries in world competition, even as the free market determined which of them ultimately met the test of "comparative advantage."
This plan would not be copied by nations that are net exporters, because their ICs would be valueless. Would major exporting countries retaliate in other ways? Would this start another Smoot-Hawley tariff war? Hardly. At the time of Smoot-Hawley we ran an unreasonable trade surplus that we wished to maintain. We now run a damaging deficit that the whole world knows we must correct.
For decades the world has struggled with a shifting maze of punitive tariffs, export subsidies, quotas, dollar-locked currencies, and the like. Many of these import-inhibiting and export-encouraging devices have long been employed by major exporting countries trying to amass ever larger surpluses -- yet significant trade wars have not erupted. Surely one will not be precipitated by a proposal that simply aims at balancing the books of the world's largest trade debtor. Major exporting countries have behaved quite rationally in the past and they will continue to do so -- though, as always, it may be in their interest to attempt to convince us that they will behave otherwise.
The likely outcome of an IC plan is that the exporting nations -- after some initial posturing -- will turn their ingenuity to encouraging imports from us. Take the position of China, which today sells us about $140 billion of goods and services annually while purchasing only $25 billion. Were ICs to exist, one course for China would be simply to fill the gap by buying 115 billion certificates annually. But it could alternatively reduce its need for ICs by cutting its exports to the U.S. or by increasing its purchases from us. This last choice would probably be the most palatable for China, and we should wish it to be so.
If our exports were to increase and the supply of ICs were therefore to be enlarged, their market price would be driven down. Indeed, if our exports expanded sufficiently, ICs would be rendered valueless and the entire plan made moot. Presented with the power to make this happen, important exporting countries might quickly eliminate the mechanisms they now use to inhibit exports from us.
Were we to install an IC plan, we might opt for some transition years in which we deliberately ran a relatively small deficit, a step that would enable the world to adjust as we gradually got where we need to be. Carrying this plan out, our government could either auction "bonus" ICs every month or simply give them, say, to less-developed countries needing to increase their exports. The latter course would deliver a form of foreign aid likely to be particularly effective and appreciated.
I will close by reminding you again that I cried wolf once before. In general, the batting average of doomsayers in the U.S. is terrible. Our country has consistently made fools of those who were skeptical about either our economic potential or our resiliency. Many pessimistic seers simply underestimated the dynamism that has allowed us to overcome problems that once seemed ominous. We still have a truly remarkable country and economy.
But I believe that in the trade deficit we also have a problem that is going to test all of our abilities to find a solution. A gently declining dollar will not provide the answer. True, it would reduce our trade deficit to a degree, but not by enough to halt the outflow of our country's net worth and the resulting growth in our investment-income deficit.
Perhaps there are other solutions that make more sense than mine. However, wishful thinking -- and its usual companion, thumb sucking -- is not among them. From what I now see, action to halt the rapid outflow of our national wealth is called for, and ICs seem the least painful and most certain way to get the job done. Just keep remembering that this is not a small problem: For example, at the rate at which the rest of the world is now making net investments in the U.S., it could annually buy and sock away nearly 4 percent of our publicly traded stocks.
In evaluating business options at Berkshire, my partner, Charles Munger, suggests that we pay close attention to his jocular wish: "All I want to know is where I'm going to die, so I'll never go there." Framers of our trade policy should heed this caution -- and steer clear of Squanderville.
FORTUNE editor at large Carol Loomis, who is a Berkshire Hathaway shareholder, worked with Warren Buffett on this article.
Here's some info on the Euro vs. the Dollar. At this rate he's getting his arse kicked, if $1.22 is the break even point.
He should of covered his bet last spring. Pigs get fat, and hogs get slaughtered!
You're kidding, I assume.
He IS about 2 billion dollars ahead and I DID subtract his losses against his winnings. Once again, following is an annual breakout of his winnings and losses, including data from page 41 of Berkshire's 2004 Annual Report:
Berkshire Hathaway investment gains (losses) from Foreign currency forward contracts (in $millions) 2002................. 297 2003................. 825 2004................. 1839 2005 (1st 3 quarters) -897 --------------------- ---- TOTAL................ 2064
As you can see, his investment gain was 2.961 billion dollars (297 + 825 + 1839 million) from 2002 through 2004. His loss in the first three quarters of 2005 (the latest data that's been released) was 0.897 billion dollars. Subtract that from his gain of 2.961 billion and you get a net gain of 2.064 billion dollars.
Secondly, he's not your average investor. The man used to move mountains with his words, but I'm not sure that people think he's being completely objective when he talks about our trade deficit, etc. etc., so I'm not slamming the average investor who hedges his bet in a portfolio.
So it's fine to hedge a small portfolio but, if you hedge a large portfolio and express your views about the trade deficit, you're a "betting against America jackass"? It's surprising to hear a view like that on a supposedly conservative forum.
Here's some info on the Euro vs. the Dollar. At this rate he's getting his arse kicked, if $1.22 is the break even point.
First of all, Buffett is not hedging only via the Euro. According to page 72 of Berkshire's 2004 Annual Report foreign currency contracts are spread among 12 currencies. Secondly, that $1.22 "break even point" must be just for this year. The following graph shows the U.S. Dollar to Euro exchange rate over the last five years:
Over the period that Buffett has been hedging (since 2002), the break even point is obviously a great deal lower. Hence, it's not surprising that Buffett is currently about 2 billion dollars ahead.
Thanks for posting that article by Buffett. It contains one of the more interesting proposals that I've heard for dealing with the trade deficit.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.