I.O.U.S.A - Addison Wiggin [32]
However, as those on the other side of the argument point out, countries with large and long - term trade imbalances also maintain a low national savings rate. Conversely, those countries with trade surpluses (such as Germany, Canada, and Japan) have a high national savings rate. Those arguing against trade defi cits believe that GDP and employment will be pulled down by a large trade defi cit over the long run. As goods fl ow into the United States from other countries, the country is los-
Trade Defi cit:
ing opportunities to produce these goods domestically, which When imports
exceed exports. In
subsequently has an adverse effect on U.S. jobs.
other words, when
Somewhere in the middle of these two sides is the world ’ s you are buying
richest man, Warren Buffett. Mr. Buffett believes that, on a more from other
whole, trade is a good thing for America, but that over the countries than you
long term, running “ large and persistent ” trade imbalances are producing.
will be problematic for the United States.
The Road to Squanderville
Mr. Buffett realizes the importance of having the average American understand big economic issues, like the trade defi cit.
As a result, he wrote an article in 2003 for Fortune magazine, c04.indd 60
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Chapter 4 The Trade Defi cit 61
called “ Squanderville vs. Thriftville. ” This parable of sorts was designed to simplify for the readers the problems inherent in trade imbalances.
“ Economics tends to put people to sleep, ” Mr. Buffett told us when we sat down with him in his offi ce at Berkshire Hathaway, where he is CEO and largest shareholder. “ And I thought by creating a couple islands with inhabitants of quite widely different activities that it might get across a point that otherwise they get lost on. ”
In Buffett
’ s story, he outlined two side
- by - side islands:
Thriftville and Squanderville. On these islands, land is the capital asset, and these primitive people only need food and produce only food. At fi rst, the citizens of both islands work eight hours a day and produce enough to sustain themselves. However, as time passes, the Thrifts realize that if they work harder and put in longer hours, they can produce a surplus of goods and then trade what they produce with the Squanders. The people of Squanderville like the idea of working less — and all the Thrifts want in exchange for these goods are “ Squanderbonds, ” which are denominated in “ Squanderbucks. ”
As time goes on, these Squanderbonds begin to pile up and it is clear that the Squanders will have to put in double time to eat and pay off their growing debt.
“ Meanwhile, ”
writes Buffett, “ the citizens of Thriftville begin to get nervous.
Just how good, they ask, are the IOUs of a shiftless island?
So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville. ”
“ At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat — they have nothing left to trade — but they must also work additional hours to service their debt and pay Thriftville rent on the land that they so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest. ”
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62 The
Mission
In a nutshell: Buffett ’ s story illustrates that any short - term actions have long - term consequences that sometimes people don ’ t think about in the short run. This is