Buffett Issues Warning Over Trade Deficit

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.

"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."

From the Grandfather Forigien Exchange Report

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.

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.

Ok, so if someone is betting on a down dollar. Would this help or hurt that cause. [Flavius]

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.

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