A current account balance is defined, according to econterms.com as, the difference between a country's savings and its investment. [If the current account balance is] positive, it measures the portion of a country's saving invested abroad; if negative, the portion of domestic investment financed by foreigners' savings."
All of the bipartisan joy expressed over free trade, cheap imports and keeping the dollar low against foreign currencies does not seem to be shared by Buffett.
Paying for The Sins of Our Fathers
Should we continue to run current account deficits comparable to those now prevailing, Buffett wrote, the net ownership of the U.S. by other countries and their citizens a decade from now will amount to roughly $11 trillion. And, if foreign investors were to earn only 5% on that net holding, we would need to send a net of $.55 trillion of goods and services abroad every year merely to service the U.S. investments then held by foreigners. At that date, a decade out, our GDP would probably total about $18 trillion (assuming low inflation, which is far from a sure thing). Therefore, our U.S. family would then be delivering 3% of its annual output to the rest of the world simply as tribute for the overindulgences of the past. In this case, unlike that involving budget deficits, the sons would truly pay for the sins of their fathers.
No Political Will, No Real Reform
Whats most disturbing about the Wizard of Omahas analysis is that there is practically zero political will to do anything about this problem. Its probably further down on the list of priorities than global warming.
It just seems a bit strange that the Chairman of our local newspaper is so keenly attuned to the dangers represented by the Republican hegmonys indifference to basic finance, while his editors continue to celebrate corrupt, Pataki-ite pie in the sky projects like the Bass Pro project, locally.
Immoral First World Debt
Meanwhile, its nice to know that the recent bankruptcy reform bill was greased through Congress with the assistance of forty million dollars in lobbying fees by credit card companies. That bill will make it much harder for the middle class to work through bankruptcy problems. If things keep going the way they are, both our government and many average Americans will find themselves stuck in a permanent debtors prison, as a result of the myopic worldview that is best exemplified here in Erie County by the Tax Revolt, being pushed by The Buffalo News.
Upward, Outward and Back Into War At the risk of sounding like a Marxist primer from the nineteenth century lets say that its not a question of whether this steady flow of capital up the class ladder and out of the country will cause a collapse, it appears now to be just a matter of when. The only preventative measure that seems to be under way to prevent a collapse is an expansion of hostilities in the Middle East.
If both tariffs for and massive investment in national industry are no longer possible, the means to deal with increased debt are somewhat limited. Higher taxes are out of the question except those imposed on the lower classes in the form of flat taxes and an increase in revenues from things like gambling, and sin taxes.
An obvious answer now, as it has been so many times in the past, is war. Expansion of the Middle East conflict seems difficult, if not impossible to manage, but the Neocons have confidence. Eventually, theyll be able to pay for it all with Iraqi oil. As I was writing this, I realized that this might be a bit of a stretch. Certainly in a modern economy, using war as a cover or even a solution for serious trade problems would not be an option. With Arch-Neocon Paul Wolfowitz heading the World Bank, the argument that an expanded conflict has become a critical component of this countrys economic strategy suddenly seems a lot more plausible.
Europeans might feel this is a case of been there, done that, what with having fought two world wars and all, but to the average American, the idea is not without allure. Historically, this kind of strategy has worked out pretty well in this country. The banking crisis brought about in the Andrew Jackson administration was a distant memory after the spoils of the Mexican War.
In short, we are now on a permanent war footing, in the Presidents own words. Our main hope now is that our military adventures will exceed expectations and provide us with continued growth through control of oil reserves. Its like a national version of Buffalos famed Silver Bullet projects.
Buffalos Biggest Export: Human Beings Joel Giambra was elected, in part, because of the effectiveness of his campaign slogan: Keep Our Kids. The current Gospel of Austerity, if anything, insures that the brain drain will continue.
Somewhere along the way, perhaps during the seventies and eighties as our manufacturing base declined, we began to trade our wealth for product. Our wealth came in many forms, from a highly skilled work force to cheap hydroelectric power and other resources. What we got in exchange was access to the American dream: an NFL franchise, suburban malls, and other forms of economic development junk food. Now it appears that we are, in Buffetts words, truly paying tribute for overindulgences.
Our product became poverty and people were the raw material. Attempts to reinvigorate the economy with government investment fell victim to political corruption,. Years of borrowing by unaccountable public authorities have turned us into the sharecropper society of which Buffett speaks, and the result is the sort of first world client state that we now have.
Buffett: From Owner to Sharecropper This annual royalty paid the world which would not disappear unless the U.S. massively under-consumed and began to run consistent and large trade surpluses would undoubtedly produce significant political unrest in the U.S. Americans would still be living very well, indeed better than now because of the growth in our economy. But they would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an Ownership Society will not find happiness in and Ill use hyperbole here for emphasis a Sharecroppers Society. But thats precisely were our trade policies, supported by Republicans and Democrats alike, are taking us.
Sounds like Buffalo in a nutshell. We can complain about Albany until the cows come home, but they hold the purse strings and they also continue to generate bad debt. If the rest of the world is looking for an example of the kind of sharecropper society Buffett is talking about, they need only look at the town that hosts the daily newspaper he owns.
For Buffetts complete comments go to: http://www.berkshirehathaway.com/2004ar/2004ar.pdf How Buffalos Crisis May Foreshadow the Nations Future
By John McMahon
As The Buffalo News continues to paint a Pro-Pataki happy face on the collapse of Erie County government, The Newss Chairman, world-renowned investor Warren Buffett has been causing some consternation because of his prediction about the perils in store for the United States if it continues running large current account deficits.
His firm, Berkshire Hathaway has, for the first time ever, started investing in billions in the currency market a sign that Mr. Buffett may not have faith that the dollars current decline can be controlled. In warning of the danger of a sharecropper society, Buffett was inadvertently describing a condition already being experienced by many of his papers readers in the City of Buffalo.
In his eagerly awaited letter to Berkshire Hathaway shareholders, released earlier this month, Buffett criticized a different kind of broken government system than the one weve been reading about here in Erie County he was referring to our nations current account balance.