When the Sage of Omaha, Warren Buffet, fretted last year that the trade deficit signified that foreigners were taking over the United States, he echoed common misunderstandings about the excess of U.S. imports over exports and the growing volume of dollar assets held by the rest of the world.

(See: “Warren Buffett fears foreign ownership“)

However, like many, many others, Mr. Buffett did not correctly distinguish between a trade deficit that is in foreign currency and one that is in the currency of the country with the deficit.

The nice thing about the U.S. trade deficit is that it represents the exchange of foreign goods and services for dollars, not foreign money. Dollars (like other money today) is fiat currency. In other words, if you go to the U.S. Treasury with your dollars, they will give you back dollars — not gold, or euros, or Indonesian Rupiah — just dollars.

That means that when the rest of the world gets tired of holding dollars and investing in U.S. bonds and equities, the only way that these dollar-holders can ‘redeem’ the currency is to buy stuff in the United States.

Since When Is Full Employment Bad?

Mr. Buffett claimed that future generations of Americans would have to work ‘extra hours’ in order to work off the trade deficit, and indeed they will.

When the rest of the world decides to move out of dollars, which will probably happen sooner or later, these dollar-holders will have to do so by purchasing goods from American factories, produce from American farmers, paying tuitions at American colleges, or visiting Disneyworld in Orlando, Florida.

All of these things will provide employment for Americans.

Indeed, Americans will have to work ‘extra hours’ to bring home this rich bonanza.

‘Working extra hours’ sounds to me like full employment, not slavery.

There is no due date on the conversion of dollars to foreign currency and if the rest of the world wants to buy stuff from the U.S., they will, like Jack Nicholson said in the movie, have to ‘ask nicely’.

In short, the trade deficit represents first-rate unemployment insurance for coming American generations.

The “deficit” is not debt, only postponed exports and future employment opportunity.

This entry was posted on Sunday, April 9th, 2006 at 4:30 pm and is filed under Foreign Investors. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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