Warren Buffet’s Sobering View of the U.S. Trade Deficit
In 2003, Warren Buffet wrote a piece for Fortune Magazine called “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.” In this article, Buffett predicts all kinds of scary things for the future of our nation if we allow our enormous trade deficit to continue to expand (FYI, it has).
In the article, Buffett describes the U.S. trade deficit this way: “In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% 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.”
Better yet, I won’t summarize. Here is the actual article:
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
November 10, 2003
(FORTUNE Magazine) – 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.
To read the rest of this article (and I hope you will), click on this link: http://www.berkshirehathaway.com/letters/growing.pdf
Our trade deficit is a serious problem that we need to do something about soon. We can’t wait around for Washington to fix this problem because if they were going to take bold action to address this, they would have done something by now. However, every one of us can do our part to address this problem by buying American. Please consider taking the Buy American Challenge today.