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The Tally Ho

Sunday, January 30, 2005

Buffet and Gates on the Weak Dollar

Comments found here.

``I'm short the dollar,'' Gates, chairman of Microsoft Corp., told Charlie Rose in an interview late yesterday at the World Economic Forum in Davos, Switzerland. ``The ol' dollar, it's gonna go down.''

Gates's concern that widening U.S. budget and trade deficits are undermining the dollar was echoed in Davos by policymakers including European Central Bank President Jean-Claude Trichet and German Chancellor Gerhard Schroeder.

Gates reflected the views of his friend Warren Buffett, the billionaire investor who has bet against the dollar since 2002. Buffett said last week that the U.S. trade gap will probably further weaken the currency.

``Unless we have a major change in trade policies, I don't see how the dollar avoids going down,'' Buffett said in an interview with CNBC on Jan. 19.

Today in New York Observer today, Nicholas von Hoffman writes in his piece A Weakening Dollar Means a Weaker U.S. that
The connection between debt and the dollar is getting through to people. They are looking at the anemic dollar and agreeing that the cause is that the United States, government and private sector are in debt up to their eyeballs to foreigners. Washington borrows from foreigners because it spends more than it collects in taxes and American financial institutions do not lend it the difference between the two sums. The cause is also the nation’s consumers: Since they don’t earn enough in euros, yens, yuans and other foreign currencies to pay for their purchases of imported goods, the money for their new cars, credit-card debt and even for home mortgages is being supplied by Asians, most notably China and Japan.

This may be news to the laggard millions. Neither George W. Bush nor John Kerry discussed it in their electioneering, though eminent persons such as former Secretary of the Treasury Robert Rubin, ex of Goldman Sachs and now one of the biggest kahunas at Citigroup, have been screaming their heads off for years, warning of a coming catastrophe. In one form or another, we owe about $3 trillion, and even if our lenders would like to have us borrow money forever, there may come a time when they can no longer afford us.

The situation has no parallel. In other cases of a country taking on gigantic debt, the cause has been social spending by a government unable or unwilling to tax its citizens to pay for their health, retirement and other benefits, which has made up the difference by borrowing abroad. Argentina is a textbook example. That’s not the case with the United States, however: Its largest social-welfare programs, Social Security and Medicare, do not run up big debts. To the contrary, the taxes collected for them are larger than the outlays.

Even the dirty war in Iraq cannot be given all the blame. Those expenditures could be managed if we taxed ourselves to pay for them. The nut of the problem is that Americans have champagne tastes and a beer pocketbook. We buy more than we sell. We are enabled and egged on to do so by a government which puts more cash in our wallets by tax cuts and urges us to spend, spend, spend.

According to classic economic theory, the resolution to the imbalance between what we buy and what we sell abroad will be more or less automatic. As the dollar declines in value in reaction to the ever-growing sum borrowed from foreigners to buy their goods, the price of those goods should rise until Americans cannot afford them. At the same time, American exports will get cheaper, so foreigners will buy more of them. In the past, the theory has often proven out.

This time—at least so far—it hasn’t worked that way. The Asian countries have propped up the value of the dollar, thus keeping American goods relatively expensive and their own goods relatively cheap. So the borrowing goes on, although now, for the first time, we are seeing foreign investors pulling back and foreign central banks beginning to replace some of their reserve dollars with euros.

Read the whole piece. Perhaps the Tally Ho's resident international finance guru, Nico, will stop in for a chat.


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