

Warren Buffett: Thriftville vs. Squanderville (2003) [pdf] - walterbell
http://archives.democrats.science.house.gov/Media/File/Commdocs/hearings/2008/Oversight/22may/Additional_Documents_Gomory.pdf

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sethev
There seems to be some confusion about this in the comment so far: a trade
deficit is different from a budget deficit and the two aren't really
connected. A trade deficit means that the people of the United States, in
aggregate, import more stuff then they export. This has nothing to do with the
national debt or government budgets.

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derf_
My first question was: how did the statistics he's quoting change in the
subsequent dozen years?

Charts of 2007-2015 Q1:
[https://www.bea.gov/newsreleases/international/intinv/intinv...](https://www.bea.gov/newsreleases/international/intinv/intinvnewsrelease.htm)

More detailed data back to 1976:
[https://www.bea.gov/international/bp_web/tb_download_type_mo...](https://www.bea.gov/international/bp_web/tb_download_type_modern.cfm?list=2&RowID=144)

In short, the U.S. is now $7 trillion in the hole (39% of GDP), and most of
that damage has been done in the past 5 years. In 2007 that hole was just
$1.35 trillion. In 2014 alone the U.S. position worsened by $1.7 trillion.

-$1.2 trillion of this was due to exchange rates: other countries are running their printing presses faster than the U.S. is, so it is losing the competitive currency debasement race kicked off in 2008. This is not news, but it makes this number _worse_ because it causes U.S. assets held by foreigners to appreciate faster relative to foreign assets held by U.S. citizens.

Price changes contributed another -$0.35 trillion. That is, even in local
currencies, U.S. investments made by foreigners had a better return than
foreign investments held by U.S. citizens.

Then all the way down at -$0.24 trillion was "net financial transactions", or
the trade deficit, which is the thing Buffett's IC proposal would actually be
able to control.

In other words, unless I have misunderstood something, balancing the trade
deficit, or even running a substantial surplus is not going to solve these
problems at the rate they are going. The question is how much of the current
trends are sustainable.

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netcan
The challenge of economic storytelling is always about which story lines to
include, what's a major and relevant.

Real economies have other story lines. In this made up world, food is the only
output and 8 hours per day equals a workers daily food needs. But in our
world, investment can lead to technology and an improvement in the labour-
output ratio, not just a future claim to output. Squanderville economists
might claim that they are investing, not spending.

Investment and spending are economically fungible and hard to distinguish. But
maybe squanders are are buying food with squanderbuck IOUs so that they can
spend their 8 hours genetically engineering a better coconut tree, with twice
as many coconuts per hour of labour and acre of land.

I'm not trying to contradict the story. In fact, I generally agree with the
overall sentiment. I think it is immoral (aside from the economics) for
governments to accumulate debts to be paid by future generations. In fact, I
think we need to find mechanisms for accumulating national wealth for future
generations. I'm just slightly wary of such storytelling.

I really disagree with his "tariffs by another name" ICs. This is a crazy
plan. It would be enormously distortive and would have so many loopholes that
the unintended side effects would be of epic proportions.

Trade restrictions are tackling the "problem" from the wrong end. The problem
is overspending, deficits. It isn't imports. Imports are a result.

~~~
nhaehnle
It seems unfair to lay the blame for this situation on the US government.
After all, I expect most US government spending goes to domestic recipients,
not to imports.

Asking for the US government to reduce its deficit is also not likely to be
productive: It would certainly reduce US GDP and destroy jobs, but it's
unclear how that would help balance international trade.

It is also not a good idea to ask for mechanisms to accumulate "national
wealth" in the form of foreign assets, because (as the Euro crisis shows so
clearly) that is a strategy that cannot be applied universally.

In the end, I suspect Buffett is right that some kind of tariff is required to
"punish" the bad behavior of Thriftville.

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tszyn
That's a very well-written and clearly argued piece, but you could apply the
same logic to argue that it's a business should not raise capital on the stock
market because it amounts to "selling the farm to feed your family". But most
businesspeople would say that it's quite OK if the money is invested
productively. As the owner of the business, you probably shouldn't care if
your equity shrinks to 10% of the company, as long as the outside financing
helps you grow it to more than 10 x the original size. Similarly, it might not
matter to Americans if eventually 90% of US-based assets are owned by
foreigners, as long as the 10% that's owned by Americans is huge. So this
whole "Our national wealth will soon be owned by foreigners" scenario is
probably not as bad as it sounds.

The way Buffett phrases it also seems misleading on a language level. He talks
about "foreign ownership of OUR assets". But how can you say they are YOUR
assets if they were paid for by foreign investors? If a US company sells 50%
of its shares to a German bank, and uses the money to build a plant, can you
say "OMG, Germans own 50% of OUR plant"?

~~~
sethev
In Buffet's example foreign investment is caused by the trade deficit, not the
other way around. The investments are made to protect the transfer of wealth
that already took place. In other words, people in other countries are buying
US assets with the money that we gave them. This isn't really comparable to
selling equity in exchange for money that will be used to invest in future
growth.

~~~
tszyn
That's true, in his example he makes a point of stressing that the foreign
value is consumed rather than invested. But it's not clear that that's what
happens in real life. For example, if China sends an excess of resources to
"the US", and in return "the US" gives China shares or bonds issued by US
companies, then the extra resources are presumably used by these companies in
a productive way. (When a company acquires capital on the market, it is
usually to invest it.)

BTW, it seems to me that foreign investment is _always_ caused by a trade
deficit, not the other way around. If the Rest of the World (RoW) wants to
invest in the US, it has to acquire dollars. The only way RoW can acquire
dollars is to sell more stuff to the US than it buys from the US. In other
words, it has to be in trade surplus with the US. So the US has to be in trade
deficit.

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netcan
Warren Buffet is someone business people should read for style tip, I reckon.

The disclosure he does is such a contrast to the positive spins style that
exists almost everywhere else. His writing reads as far more trustworthy and a
lot of that has to do with style.

~~~
ealexhudson
He did have that particular letter copy-written by an excellent editor though,
which undoubtedly helps a lot :)

------
lindig
> "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."

This seems apt. While I agree with his sentiment we currently have the
situation of a strong US Dollar despite continuous high US deficits - in
contrast to his forecast. Europe is going the route of limiting deficits (as
Warren Buffet suggests in his letter) and receives lots of criticism for this
from US economists.

~~~
tim333
Yeah, while I'm a big Buffett fan I think he called that one wrong. I don't
think macro is his strong point.

~~~
sumedh
He keeps saying that the whole time, that he does not look at macro when
making decisions.

------
brownbat
Trade deficits are driven by national savings and investment rates, which can
be in turn driven by all sorts of mostly benign social or cultural factors,
and so its hotly debated whether they matter at all.

DeLong has some explanations, claiming that savers around the world pay a
premium for dollar denominated assets, which really messes up this entire
analysis. [0]

The upshot is that the rate of return on our foreign assets tends to be better
than the return to foreign investment in the US. [1]

That could be right, at least makes some sense... foreigners are just buying
something to say they bought something in the US (as a hedge against political
catastrophe? maybe still a good buy).

So if it's true that there's a rate of return gap, then our massive
"purchases" abroad are really investments that will pay for themselves. If so,
we'll probably reinvest those returns, often abroad, so we'll never wipe the
deficit, and probably even add to it over time, even while coming out ahead.

[0]
[https://web.archive.org/web/20070806050555/http://www.j-brad...](https://web.archive.org/web/20070806050555/http://www.j-bradford-
delong.net/movable_type/2003_archives/001993.html)

[1]
[http://econlog.econlib.org/archives/2006/08/do_we_even_have....](http://econlog.econlib.org/archives/2006/08/do_we_even_have.html)

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grogers
Here is a link to the same content in a typeface that has more reasonable
kerning and is easier to read.

[http://www.berkshirehathaway.com/letters/growing.pdf](http://www.berkshirehathaway.com/letters/growing.pdf)

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TheMagicHorsey
The import certificate scheme would violate WTO rules regarding free-trade.
You can't just levy what is essentially a tariff on imports after you have
committed to free trade as a condition to enter foreign markets.

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jqm
But what if the citizens of Squanderville have a bunch of guns and aren't
afraid to engage in ruthless activity to prop up their lifestyle?

