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Lessons from Warren Buffett - LIII - Views on News from Equitymaster
 
 
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  • Sep 10, 2008

    Lessons from Warren Buffett - LIII

    In the previous article, we learned how investors earn suboptimal returns from markets by not understanding the real meaning of investing. Let us go further down the same letter and see what other investment wisdom the master has on offer.

    Although Warren Buffett is a self-proclaimed macroeconomics basher, it does not stop him from proffering his views on the US economy from time to time. And he has devoted a substantial part of the 2004 letter to a discussion on the same. The US economy, it should be noted, has been running a huge current account deficit for quite some time now and the master, in his own unique way has gone on to provide an excellent account of the long-term repercussions of the same. A current account deficit, for the uninitiated, means that an economy has been importing more goods and services than it can export. While a current account deficit may not be novel to close followers of the Indian economy, for the US economists it was indeed something they had not been exposed to for a long period of time.

    The master's golden words
    Trying to explain the long-term impact of consistently running a current account deficit, the master goes on to add, "Should we continue to run current account deficits comparable to those now prevailing, 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."

    He further adds, "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 I'll use hyperbole here for emphasis - a "Sharecropper's Society." But that's precisely where our trade policies, supported by Republicans and Democrats alike, are taking us."

    The rise of the Sovereign Wealth Funds
    Indeed, the burgeoning foreign exchange reserves at most Asian countries and the rapid rise of the sovereign wealth fund in recent times can be attributed to the American extravagance that the master has dealt with in the above paragraphs. Clubbed together, these institutions own trillions of dollars worth of US assets, the interest on which will of course have to be paid by the US government, which in turn will come from the pockets of the average American citizen. Thus, as so rightly pointed out by the master, the sons will truly pay for the sins of their fathers.

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