I.O.U.S.A - Addison Wiggin [93]
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Let ’ s take an extreme example. At the time of the Revolution, we ’ d send somebody over to King George, and he ’ d say, “ Listen, this fi ght is hardly worth it. A lot of people will be killed. Why don ’ t we just make a deal with you? We want our independence. We ’ re kind of a pain in the neck anyway. So why don ’ t we just give you 3 percent of our output forever, and you give us our freedom? ”
Now, King George might have liked that, and the American colonists might have liked that. We weren ’ t producing that much anyway. It saves you going to war, maybe getting shot and killed.
So the fi rst generation would say, “ It ’ s a fair deal. ” Three percent royalty to the English, we get our freedom, and nobody gets killed.
The next generation might even be okay with this.
It wouldn ’ t work now. If we were giving 3 percent of the output of the United States to England for freeing us 220 or however many years ago, we ’ d have fought a war with them over it or we ’ d have repudiated it.
That ’ s an extreme case, obviously, but if 15 or 20 years from now, 2 or 3 percent of the GDP is being paid abroad merely to service the debts or the ownership of assets that have been incurred because we ’ re overconsuming, that will be politically unstable. Many years ago, when we lent a lot of money to various emerging countries and were having trouble getting paid back, somebody said that they found it very hard to imagine some Philippine or Thailand worker spending a couple of extra hours every week in the hot sun merely so Citicorp could increase its dividend twice a year. At a point, people just say, “ To hell with it. ” It ’ s much easier just to infl ate your way out of it. If you ’ re in a South American or Asian country that owes money in dollars, it gets very binding to pay back in dollars. But if you owe it in your own currency, you just print more currency. And we have the ability to print more currency. We can denominate debt in our own currency, whereas many countries can ’ t because people don ’ t trust them.
Q: China is the largest consumer of U.S. debt right now. If they were to slow down the purchasing, then the Treasury has to c14.indd 189
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190 The
Interviews
increase the interest rate in order to raise the money that they need. Is that right?
Warren Buffett: Yes. Hypothetically, let ’ s say that right now China may be running a trade surplus with us of $ 250 billion a year. Part of that surplus, they used to fi nance a defi cit they run with the rest of the world. In other words, their total trade surplus is less than the $ 250 billion they ’ re running with us. Now, they ’ re also running a trade defi cit with the rest of the world. So, some of the surplus with us goes to that. Some of the surplus is used to buy U.S. assets.
In this hypothetic situation, we ’ ll say they ’ re putting the whole $ 250
billion in U.S. treasuries each year, so they are a net buyer of $ 250
billion in U.S. treasuries. Now, let ’ s say they decide they ’ d rather buy $ 100 billion a year of U.S. treasuries. That simply means they put the other $ 150 billion in other assets that they buy here. They might buy stocks, they might buy businesses, and they might buy real estate. If they buy those stocks, bonds, and real estate, they hand that $ 150 billion to those people for those assets, and those people can go buy the Treasury bills. If I quit buying bonds today and start buying stocks, or if I quit buying stocks and buy bonds, it ’ s very hard to measure exactly what effect that will have on stock or bond markets, because there ’ s somebody on the other side of every transaction. You always have to say, “ And then what? ”
Q: Are we going down a road where the trade defi cit is really going to become dangerous?
Warren Buffett: I think it will have political effects