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Dobbs' missive today:
President Bush's assurances that we'll all be "just fine" if he
and Congress can work out an economic stimulus package seem a little
hollow this morning.
Much like Federal Reserve Board Chairman Ben Bernanke's assurances last
May that the subprime mortgage meltdown would be contained and not
affect the broader economy. And it seems Treasury Secretary Henry
Paulson has spent most of the past year trying to influence Chinese
economic policy rather than setting the direction of U.S. economic
policy.
Remember Paulson's Strategic Economic Dialogue® that I labeled a Fruitless Economic Monologue?
Dobbs continues:
The irresponsible fiscal policies of the past decade have led to a
national debt that amounts to $9 trillion. The irresponsible so-called
free trade policies of Democratic and Republican administrations over
the past three decades have produced a trade debt that now amounts to
more than $6 trillion, and that debt is rising faster than our national
debt. All of which is contributing to the plunge in the value of the
U.S. dollar.
And about the "stimulus package?" What about that?
Bernanke endorsed the concept of a short-term economic stimulus
package, but he cautioned that the money must be spent correctly: "You'd
hope that [consumers] would spend it on things that are domestically
produced so that the spending power doesn't go elsewhere."
Just what would you have us spend it on? The truth is that consumers
spend most of their money on foreign imports, and any stimulus package
probably would be stimulating foreign economies rather than our own.
Imports, for example, account for 92 percent of our non-athletic
footwear, 92 percent of audio video equipment, 89 percent of our
luggage and 73 percent of power tools. In fact, between 1997 and 2006,
only five of the 114 industries examined in a U.S. Business and
Industry Council report gained market share against import competition.
(emphasis mine).
These are our leaders.
Warren Buffett told us all why he was not buying the U.S. dollar in
2003. Because of the trade deficit. "Squanderville and
Thriftville" was the metaphor. The full Fortune article is below
the fold. (read more). It's worth re-reading.
*****
Why I'm not buying the U.S. dollar
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.
By Warren E. Buffett, FORTUNE
Oct. 26, 2003
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.
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