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parity problem where we are having hyper infl ation. We aren ’ t. The U.S. ’ s relative attractiveness versus foreign countries since 2002 has declined dramatically, but not because the U.S. has done something wrong. It ’ s because everyone else in the rest of the world is fi nally copycatting supply side economics. Seventeen or 18 countries now have low rate fl at taxes? They have emulated our supply side policies, and they ’ ve become far more attractive to investments. The U.S. had been the capital magnate of the world since Reagan ’ s tax policies and Volcker ’ s monetary policies. We had a huge capital surplus as everyone tried to invest in the United States. Warren Buffet would call that a trade defi cit, but he ’ s wrong. It ’ s a capital surplus. Since 2002, with the improvement abroad, people have tried to move their net investments from the U.S. and more toward foreign c17.indd 242

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countries. The fi rst impact of that is that the value of the dollar falls. It ’ s done it many times in the past, and it ’ s happening now.

It ’ s exactly the way markets should work, because the rest of the world is doing a lot better job of being attractive to output employment production and investments. Now, as you can see, the U.S. trade defi cit is starting to fall like a stone. It ’ s gone from 6.1 percent of GDP down to 4.8 percent, and it ’ s going to fall a lot further. Once it ’ s gone its route, you ’ ll see the dollar coming back in strength. There is nothing fundamentally wrong with the dollar.

It ’ s not like it was in the ‘ 70s. Far from it. That was a purchasing power parity infl ation problem. This one is a relative capital attractiveness issue and it ’ s not a problem. Foreigners are doing a great job, and we want them to do a great job.

Let me talk about the trade defi cit and the capital surplus a little bit. After we took offi ce in 1981 and cut taxes, brought infl ation under control, deregulated the economy, free trade — after we did all of that, there was a huge increase in the after - tax rate of return on U.S. - located assets. Everyone wanted to invest in the United States. How do foreigners generate the dollar cash fl ow to buy U.S. - located assets? There are only two ways they can do it. They have to sell more goods to us and buy fewer goods from us. The U.S. trade defi cit is one and the same as the U.S. capital surplus. Ask yourself the question, which would you rather have?

Capital lined up on U.S. borders trying to get into our country, or trying to get out of our country? Obviously, you ’ d rather have it coming in.

The trade defi cit is not a problem. The trade defi cit is the capital surplus. It shows the relative strength of the U.S. in attracting capital. Growth companies don ’ t lend money, they borrow money. They attract capital. The U.S. is the capital magnet of the world and there ’ s nothing wrong with that. We are not squandering our kids ’ or our grandkids ’ futures with credit card consumption and engorgement. That ’ s silly. The capital surplus is a sign of strength, not of weakness.

Let me give you an example. In Japan, because of their awful policies and their huge unfunded liabilities, you have a machine c17.indd 243

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that ’ s got a negative rate of return. You take that machine by truck down to Tokyo Harbor. You load that machine onto a ship in Tokyo Harbor. You send it over to the United States. You offl oad that machine in the United States. You put it on a lorry and you ship it to its location. The rate of return on that machine has gone from a negative in Japan to a positive in the U.S. By putting that machine on a ship in Japan, that ’ s a Japanese export and a Japanese trade surplus. By offl oading that machine in the U.S., that ’ s a U.S. import and a U.S. trade defi cit. The capital movement is the U.S. trade defi cit and the Japanese trade surplus. That ’ s the only way you can move capital across countries, and there ’ s nothing wrong with moving that machine from Japan to the U.S.

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