1. Fin 4201/8001 Trade Balance and Buffett

2. WB’s Analogy Thriftville Squanderville Squander Bonds Food

3. WW II through 1970 – US = Thriftyville WW II through 1970 – US = Thriftyville We were worth all the US + foreign investments We were worth all the US + foreign investments Growing value from earnings on investments Growing value from earnings on investments Seriously downhill since 1980 Seriously downhill since 1980 WB thinks we are Squanderville

4. Like the example we are consuming more than we produce Like the example we are consuming more than we produce Rest of the world owns $2.5 T more of US than we own of them Rest of the world owns $2.5 T more of US than we own of them Current rate (2003) the rest of the world could buy 4% of our stock market annually Current rate (2003) the rest of the world could buy 4% of our stock market annually What’s the big deal? We’re rich! What’s the big deal? We’re rich! But eventually we have to pay for living beyond our means. But eventually we have to pay for living beyond our means. Traditional pass on problems to future generations Traditional pass on problems to future generations The problems

7. WB’s Bet Spring 2002 started a bet against the dollar Spring 2002 started a bet against the dollar US “net worth” being transferred abroad US “net worth” being transferred abroad

8. Import Certificates Import Certificates A US exporter, would receive these for selling abroad A US exporter, would receive these for selling abroad A foreign firm would need them to sell to US A foreign firm would need them to sell to US Result = Trade Balance Result = Trade Balance Import prices and some domestic production prices rise ≈ tax on consumers Import prices and some domestic production prices rise ≈ tax on consumers Trade wars? – probably not Trade wars? – probably not Others cut exports to US or increase purchases from US Others cut exports to US or increase purchases from US As we export more, value of ICs declines As we export more, value of ICs declines ICs could also be used as form of foreign aid ICs could also be used as form of foreign aid His Solution

9. Crying wolf again?!? Crying wolf again?!? We’ve heard this before We’ve heard this before But we’re getting used to spending more than we make But we’re getting used to spending more than we make Savings rate hasn’t improved Savings rate hasn’t improved Tax on consumers Tax on consumers Imports more expensive Imports more expensive Hurts domestic economy Hurts domestic economy Cons and Pros

10. Painful but better than alternative Painful but better than alternative Not that much different than VAT Not that much different than VAT Reduces outflow of productive assets Reduces outflow of productive assets US output more competitive US output more competitive Exports expand Exports expand Jobs increase Jobs increase Once equilibrium reached, ICs could disappear Once equilibrium reached, ICs could disappear Cons and Pros