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Buffett's Squanderville all maxed out [Copy link] 中文

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Post time 2007-7-16 10:22:18 |Display all floors
Nicholas Gruen
May 24, 2007

WARREN Buffett is the billionaire from a Norman Rockwell painting who got rich by building a financial counter-culture within his investment company Berkshire Hathaway, in which managers loved their businesses so much they treated them like their own.

But he's a worried man. Populist Republican presidents such as Ronald Reagan and George W. Bush cut taxes without the hard work of cutting expenditure. The resulting government deficits — along with falling saving by households — have seen America go from trade surpluses to large trade deficits far into the future.

And who's funding America's profligacy? The Asian countries — particularly China — whose citizens, being huge savers, have the funds to invest in America and the interest in continually lifting America's credit-card limit so it can buy Asian goods.

But credit-card limits can't rise faster than income forever, and as Buffett reminds us, quoting Herb Stein: "If something cannot go on forever, it will stop."

Under current arrangements, that adjustment would happen via a drying up of Asian finance, a depreciating American dollar and a resulting recession — restraining America's rampant consumption and shifting the competitive balance towards American industry.
Buffett's concern with this solution is reminiscent of John Keynes. Keynes thought competitive markets were admirably flexible and efficient. But he also believed that certain "macro-markets" — he was thinking of labour markets, but one could make similar arguments about asset and currency markets — could flout economic fundamentals for a long time.

Buffett makes his point with an economic model dressed as storytelling. He invites his audience on "a wildly fanciful trip to two isolated, side-by-side islands of equal size, Squanderville and Thriftville".

Squandervillians live it up by borrowing from Thriftville — something they can keep doing until they've mortgaged all their assets, including their land.

This process could go on a long time before the market forces an adjustment. And by then, what damage might have been done to Squanderville's economic future, not to mention its strategic position with its financier Thriftville (sorry, I nearly said "China")?

Buffett proposes a remedy so simple it's odd that, given his profile, it's received so little attention. Under his system, you couldn't import into America without holding permits to do so. And the only way to get a million dollars worth of import permits would be to achieve exports of a million dollars from America — or buy the permits from someone who had.

WARREN Buffett is the billionaire from a Norman Rockwell painting who got rich by building a financial counter-culture within his investment company Berkshire Hathaway, in which managers loved their businesses so much they treated them like their own.

But he's a worried man. Populist Republican presidents such as Ronald Reagan and George W. Bush cut taxes without the hard work of cutting expenditure. The resulting government deficits — along with falling saving by households — have seen America go from trade surpluses to large trade deficits far into the future.

And who's funding America's profligacy? The Asian countries — particularly China — whose citizens, being huge savers, have the funds to invest in America and the interest in continually lifting America's credit-card limit so it can buy Asian goods.

But credit-card limits can't rise faster than income forever, and as Buffett reminds us, quoting Herb Stein: "If something cannot go on forever, it will stop."

Under current arrangements, that adjustment would happen via a drying up of Asian finance, a depreciating American dollar and a resulting recession — restraining America's rampant consumption and shifting the competitive balance towards American industry.

Buffett's concern with this solution is reminiscent of John Keynes. Keynes thought competitive markets were admirably flexible and efficient. But he also believed that certain "macro-markets" — he was thinking of labour markets, but one could make similar arguments about asset and currency markets — could flout economic fundamentals for a long time.

Buffett makes his point with an economic model dressed as storytelling. He invites his audience on "a wildly fanciful trip to two isolated, side-by-side islands of equal size, Squanderville and Thriftville".

Squandervillians live it up by borrowing from Thriftville — something they can keep doing until they've mortgaged all their assets, including their land.

This process could go on a long time before the market forces an adjustment. And by then, what damage might have been done to Squanderville's economic future, not to mention its strategic position with its financier Thriftville (sorry, I nearly said "China")?

Buffett proposes a remedy so simple it's odd that, given his profile, it's received so little attention. Under his system, you couldn't import into America without holding permits to do so. And the only way to get a million dollars worth of import permits would be to achieve exports of a million dollars from America — or buy the permits from someone who had.

First, it avoids "picking winners", either between industries or between import substitution and exports. That makes it more efficient and dynamic, but minimises political favouritism and the attendant rent-seeking.

Second, in a mercantile world full of countries making successful development journeys using lavish export subsidies, Buffett's system would get them thinking about importing more — to secure their export access to the American market!

Third, whether or not there's a role for such policies in developed countries, they offer a vastly superior mechanism for responding to balance of payments crises than is now provided for within current WTO rules, which permit the application of "temporary", selective tariffs.

Sadly, Buffett's intervention has sparked almost no serious interest from economists. I wonder why? Maybe economists can't figure out where to place it on that spectrum between free trade and protection that helps them work out where they stand. Is it protectionist? Kind of. But implemented cleanly it would also produce freer trade than any country has.

Back in the 1970s and 1980s, economists spilled oceans of ink exploring the costs of new forms of protection though it was pretty clear from the outset that they should be avoided where possible.

They spent far less time exploring much more important new mechanisms that were increasingly important in Asia's trade liberalisation and development.

Partly because of that, Australian economists took too long to understand (and revise their previous hostility towards) export facilitation in the car industry despite its potential benefits. And so it has been so far today.

The more things change …

Nicholas Gruen is senior fellow at Melbourne University's department of economics and CEO

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Post time 2007-7-16 10:24:07 |Display all floors
My comments on the Buffett article:

The author hits several of the same points, I wrote about.

- Government cutting taxes, without cutting expenditures

- Falling savings by households

- Buffett’s concern is that America is not investing its increased borrowing, and just living it up on the credit cards

- America goes from trade surplus to large trade deficit

- Under current arrangements, that adjustment would happen via a drying up of Asian financing, a depreciating dollar and a resulting recession – restraining America’s rampant consumption and shifting the competitive balance towards American industry.

- He fears that Americans don’t have the ticker to choose to reduce their consumption to balance trade. But if that’s the case, they’re unlikely to stick to his solution either.

My take:

Buffett is rightly concerned. Look at the GDP breakdown, as it is clear where are the problems. USA has gone from a saver nation, to the largest debtor nation in the world, by a large margin. That is not healthy for a country. Investment is the lowest percentage of C, I, G, in the GDP breakdown, not including Net Exports.

There is also no evidence the devalued dollar will help competitive balance towards American Industry. This is similar to Schumer’s opinion, but is just factually wrong. USA has devalued the dollar for the last several years, and it hasn’t helped close the trade deficit.

Foreign financing is rebalancing away. Look at the net sellers and buyers of US Treasuries. If not for China, Brazil, etc., we would have a net negative. Foreign Central Banks just slow down new purchases of UST (new financing), which increase interest rates, to offset reduced purchasing power of the devalued dollars. We see the same idea with oil, as some Middle Eastern countries just cut production enough, to force gas prices up, making up for the reduced purchasing power of a devalued dollar.

The author already mentioned several of the same problems I saw with Buffett’s idea. Here is a summary, some are the author’s concerns, and some or mine.

- Can Buffett’s idea pass WTO rules?

- Is this just a form of protectionism?

- Would it be explicit export subsides?

- Even if we had trade balance today, it still doesn’t fix 85% of the problem – over consuming by the consumer sector, and deficit spending by the government sector. This is really the tail wagging the dog.

- Can US MNCs embrace this trade balance idea? I find this highly unlikely because the first responsibility of a publicly traded Corporation is maximizing shareholder’s equity (in personal finance it is the same as net worth). When you look at US Corporate track record, they are fine selling out American workers, Unions, and outsourcing anything that can maximize their profits. I don’t think Buffett will get much support from Corporate America.

- The balance trade assumes there is enough countries demanding US exports equal to US demand for imports. Not a safe assumption! Since many countries do save money and choose not to over consume like we do. There is a built in imbalance because we consume too much. Until we can get real and focus on the real problem, this problem is only going to get worse.

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Post time 2007-7-16 11:37:43 |Display all floors
Here's a link to Charlie Rose, and what Warren Buffett said about US, China, and other interesting topics.    Sounds like he was being very diplomatic.   


http://www.charlierose.com/shows ... with-warren-buffett

[ Last edited by raymondusa at 2007-7-15 07:56 PM ]

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Post time 2007-7-19 23:17:03 |Display all floors
Buffett is rightly concerned. Look at the GDP breakdown, as it is clear where are the problems. USA has gone from a saver nation, to the largest debtor nation in the world, by a large margin. That is not healthy for a country. Investment is the lowest percentage of C, I, G, in the GDP breakdown, not including Net Exports.
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Post time 2007-7-24 10:08:31 |Display all floors

Buffett's Idea

For Buffett's idea to be adopted, US will have to implement foreign exchange controls.  US will have to issue permits before an importer can remit dollars abroad.

Come on, do you think the US will do what Mahathir did for Malaysia in 1998?

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