Understanding Views on the US Trade Deficit
Read the following article excerpt and determine the weakness in Buffett’s story from what we
have discussed in the previous class.
Focus particularly on what assumptions Warren Buffet is
implicitly making in his story that are descriptive of the economy of our experience.
the economic stocks, flows and regulators that are absent in the story.
America's Growing Trade Deficit Is Selling the Nation Out From Under Us. Here's a Way to Fix
the Problem—And We Need to Do It Now.
Sunday, October 26, 2003
By Warren E. Buffett
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
, 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