In a rather remarkable article published by Wall Street Week and Fortune Magazine, “[1] Why I’m Not Buying the U.S. Dollar“, Warren Buffett, the Sage of Omaha, claims that the trade deficit will lead to foreigners taking over the United States and that this is a very, very bad thing.

He sees the country’s “net worth” as being “transferred overseas” at an alarming rate and that this will lead to “major trouble”. He predicts that Americans will have to work “extra hours” to service the foreign debt. He sees the trade deficit as “a problem that will test all our abilities to find a solution”.

He foresees that eventually foreigners will “sell most of [the U.S. debt they hold] to Squanderville [i.e., American] residents for Squanderbucks [i.e., U.S. dollars] and use the proceeds to buy Squanderville [i.e., U.S.] land. And eventually the [foreigners will] own all of Squanderville [i.e., the United States].

What Mr. Buffett fails to understand is that the “trade deficit” is due to foreign exporters willingness to accept dollars and not to American’s propensity to “squander” their savings.

Is Mr. Buffett’s “Problem” Real?

Because foreign exporters are eager to accept dollars to settle their trades, these dollars accumulate in U.S. banks and, in turn, in various credit instruments. But, so what? Like many other fretters about the “trade deficit”, Mr. Buffett does not take into consideration that, unlike third world countries, America’s “debt” to “foreigners” is denominated in U.S. dollars which are printed by the U.S. Treasury.

Americans will never have to work “extra hours” to pay off foreign debt any more than residents of Kansas have to work overtime to pay off a state “trade deficit” with Arkansas.

Even if the foreign exporter elects to leave the proceeds from the sale of goods to Americans in a U.S.bank and if the Bank decides not to loan money to spendthift Americans, the bank will invest the funds in U.S. Treasury bills, driving down interest rates. (The Federal Reserve will always issue Treasury bills, even if the government is running a fiscal surplus, because open market operations are fundamental to their “control” of interest rates.)

The Treasury pays interest on its debt simply by crediting the creditor’s bank account with a U.S. bank. The U.S. bank, in turn, reinvests this deposit in new Treasury bills and therefore no one has to work “extra hours”, since debt repayable with your own vouchers really never needs to be repaid.

Mr. Buffett must be thinking we are still living in the age of the gold standard, when a nation’s money was backed by precious metal that it could not create out of thin air. Instead, we are living in the magnificent days of fiat money, Central Banks, and government-condoned inflation.

Should Foreigners Be Banned From Owning U.S. Real Estate?

Even if foreigners decide to use the dollars generated by the trade deficit to buy up (oh, horror of horrors!) U.S. land, this would only give the U.S. government the right to tax them on their property, rather than have the obligation to pay them interest.

If Mr. Buffett really thinks foreigners are going to rush to buy U.S. land, why doesn’t he start buying real estate instead of foreign currency? Just recall how Arab and Japanese billionaires were taken to the cleaners after buying up American “prime real estate” over the last generation.

Generally, just buying real estate to hold, without investing in improvements, results in tax revenues for the state, local, and federal government, cash flow for lucky Americans who sell the property, and a headache for the new owner.

Of course, to invest wisely in such properties, it would be necessary to make improvements, which, in turn, would create jobs for Americans. I, for one, would be happy to see Chinese businessmen buying up the decaying wharfs of New York City, transforming them into modern shopping malls with parks, fountains, and walkways.

Presumably, Mr. Buffett would prefer for, say, the Japanese to tear down Rockefeller Center and export the building, brick by brick, to rebuild in Tokyo, since this would help to reduce the “trade deficit” and keep America’s “net worth” from draining away.

Is Government Intervention Justified?

To resolve his “problem”, Mr. Buffett proposes a government-run scheme for rationing the right to trade with the U.S. through “Import Certificates,” which, of course, would be contrary to the World Trade Organization treaty that the U.S. adhered to under President Clinton.

In other words, Warren Buffett, perhaps the richest man in America, a prominent supporter of the Democratic Party and “limousine liberal” supreme, is proposing that Big Government intervene in the free market and ration rights to import and export goods and services to stop the country’s “net worth from being transferred overseas”.

Of course, under certain circumstances, the country might have a reasonable motive to intervene in foreign trade for the general good. For example, if, in the interests of national security and defense, it was deemed necessary to reindustrialize, regaining lost manufacturing capacity in order to remain “the arsenal of democracy”, this might be a justification for government intervention in foreign trade.

But Mr. Buffett’s xenophobic worries about the nation’s “net worth being transferred overseas” hardly seems to be a plausible justification for government intervention, however emotionally appealing to the uneducated proletariat.

What is Mr. Buffett Telling Us?

If the Sage of Omaha doesn’t really understand what the “trade deficit” signifies, and if Fortune Magazine and Wall Street Week share his lack of comprehension, this provides us with a useful look inside the minds of the wealthy liberal elite who might, just possibly, be running the United States after 2008, when, as almost half of the population fervently hopes, President Hillary Clinton will take the oath of office.

In his article, Mr. Buffett admits that his scheme for “Import Certificates” would inflict more than a little pain on both Americans and foreigners, but this is OK since it all would be for the “greater good”. For students of Capital Flow Analysis, Mr. Buffett’s article should be stashed away to read again in 2008, in the unhappy event that the Democratic Party regains control of government.