Wednesday, October 18, 2006

Welcome to Squanderville (a Warren Buffet description)



I know I am a little bit behind the times here when I am reading and BLOGGING about an article written by Warren Buffet in 2003....but then again, Mr. Buffet may be that far ahead of the curve. (I found reference to this article in the book I wrote about in a post of mine in my Livejournal. The book is called "Three Billion New Capitalists")

Either way, I think we can both agree that he is not a dummy, as they used to say about EF Hutton....when Buffet Speaks, people listen!

So what did he say in that article? Well, he spoke about his decision to invest in foreign currencies for the first time in his 72 year life. He said that as an American he hopes his view of what is going to happen is wrong, and that he never profits from that investment.....but he doesn't feel he is wrong, and feels it was the prudent thing to do. (and it would be irresponsible to the investors of Berkshire Hathaway if he did not.)

So what is the crux of his fear....the massive US trade deficit. He said we are very quickly draining our net worth to the rest of the world, and they will eventually recognize the fact that we will NOT be paying our bills off any time soon. (and of course will get tired of sporting us credit)

Buffet notes that our current trade deficit is 4% of GDP, and that in 2003, the world owned $2.5 trillion more of the USA than we own outside the USA.

Here is a direct quote from the article that tells the part of the story that scares me the most:

In the late 1970s the trade situation reversed, producing deficits that initially ran about 1 percent of GDP. That was hardly serious, particularly because net investment income remained positive. Indeed, with the power of compound interest working for us, our net ownership balance hit its high in 1980 at $360 billion.

Since then, however, it's been all downhill, with the pace of decline rapidly accelerating in the past five years. Our annual trade deficit now exceeds 4 percent of GDP. Equally ominous, the rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. Some of this $2.5 trillion is invested in claim checks -- U.S. bonds, both governmental and private -- and some in such assets as property and equity securities.

In effect, our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4 percent 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.

To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth. Those comparisons show that what's already been transferred abroad is meaningful -- in the area, for example, of 5 percent of our national wealth.

More important, however, is that foreign ownership of our assets will grow at about $500 billion per year at the present trade-deficit level, which means that the deficit will be adding about one percentage point annually to foreigners' net ownership of our national wealth. As that ownership grows, so will the annual net investment income flowing out of this country. That will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them, as in the past. We have entered the world of negative compounding -- goodbye pleasure, hello pain.

So he said that 5% of our wealth had been transfered away so far, and with our current trade deficit rates, they will be adding 1% per year!

I'm sorry to be such a pessimist.....but if someone like Warren Buffet is saying this, why aren't there people running for office on this sort of message? Where are the Paul Tsongas of the 21st century? Where are the H. Ross Perot's? Where are the Warren Rudmans?

Is Warren Buffet perhaps scenile and off his rocker? I have not heard that being reported either....so I guess I leave you to make up your open opinion on what is going on and what you are going to do about it.

1 Comments:

Blogger Janice said...

The politicians are not running on this slate, because that would mean logically they would have to say the "T" word--thats right.. TAXES. We can pay now or pay later... but when voters don't like the word.

J

9:16 AM EDT  

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