I.O.U.S.A. by Addison Wiggin, Kate Incontrera, Dorianne Perrucci
Tags: United States, General, History, Business & Economics, Finance, Economic Conditions, Personal Finance, Forecasting, Public Finance, Economic forecasting - United States, Economic forecasting, Finance - United States - History, Debt, Debt - United States - History
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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. ”
c04.indd 61
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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 true of the United States.
“ Our country ’ s ‘ net worth, ’ ” Buffett writes in the introduction of his Fortune article, “ is now being transferred abroad at an alarming rate. A perpetuation of this transfer will lead to major trouble. ” And it may be more than just economic trouble. History shows that countries with similar trade and debt problems are fertile ground for political movements we ’ re not accustomed to in a democratic society.
In 2007, the total U.S. trade defi cit was $ 738.6 billion, which is down 9 percent from 2006. Much of the decline could be attributed to a decline in the value of the U.S. dollar. The popular argument suggests that a lower dollar makes production of goods in the United States cheaper and therefore more attractive to buyers of U.S. goods overseas. Exports would go up. And in fact they are, each year.
Some would argue that the dollar is being kept weak to help close the trade gap. “ If I could fi nance all my own consumption today by handing out something called Warren Bucks or Warren IOUs and I had the power to determine the value of those IOUs over time, believe me, I would make sure that when I repaid them ten or twenty years from now that they were worth less, per unit, than they are today. So any country that piles up external debt will have a great temptation to infl ate over time, and that means that our currency, relative to other major currencies, is likely to depreciate over time. ”
And this is just what the United States is doing. From November 2002 through August 2008, the dollar has fallen more than 50 percent aganist the euro. Some experts will argue that a weaker dollar benefi ts the United States — at least where the trade defi cit is concerned.
What is not pointed out in this argument is that a falling dollar paired with low domestic productivity means that the c04.indd 62
8/26/08 8:59:53 PM
Chapter 4 The Trade Defi cit 63
country is consuming more than it produces. In that sense, since the dollar is losing purchasing power, Americans are paying more for these imports, and the rise in these import costs erases any sort of benefi ts the country would have seen because of a falling dollar. In other words, America is getting Purchasing
fewer goods for the same amount of money — but that isn ’ t Power: What slowing down the rate of American consumption. “ In the past money is considered to be
six or eight years, ” Buffett explains, “ the United States has worth, as measured started consuming considerably more then it produces. It ’ s by the
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. ”
c04.indd 61
8/26/08 8:59:52 PM
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 true of the United States.
“ Our country ’ s ‘ net worth, ’ ” Buffett writes in the introduction of his Fortune article, “ is now being transferred abroad at an alarming rate. A perpetuation of this transfer will lead to major trouble. ” And it may be more than just economic trouble. History shows that countries with similar trade and debt problems are fertile ground for political movements we ’ re not accustomed to in a democratic society.
In 2007, the total U.S. trade defi cit was $ 738.6 billion, which is down 9 percent from 2006. Much of the decline could be attributed to a decline in the value of the U.S. dollar. The popular argument suggests that a lower dollar makes production of goods in the United States cheaper and therefore more attractive to buyers of U.S. goods overseas. Exports would go up. And in fact they are, each year.
Some would argue that the dollar is being kept weak to help close the trade gap. “ If I could fi nance all my own consumption today by handing out something called Warren Bucks or Warren IOUs and I had the power to determine the value of those IOUs over time, believe me, I would make sure that when I repaid them ten or twenty years from now that they were worth less, per unit, than they are today. So any country that piles up external debt will have a great temptation to infl ate over time, and that means that our currency, relative to other major currencies, is likely to depreciate over time. ”
And this is just what the United States is doing. From November 2002 through August 2008, the dollar has fallen more than 50 percent aganist the euro. Some experts will argue that a weaker dollar benefi ts the United States — at least where the trade defi cit is concerned.
What is not pointed out in this argument is that a falling dollar paired with low domestic productivity means that the c04.indd 62
8/26/08 8:59:53 PM
Chapter 4 The Trade Defi cit 63
country is consuming more than it produces. In that sense, since the dollar is losing purchasing power, Americans are paying more for these imports, and the rise in these import costs erases any sort of benefi ts the country would have seen because of a falling dollar. In other words, America is getting Purchasing
fewer goods for the same amount of money — but that isn ’ t Power: What slowing down the rate of American consumption. “ In the past money is considered to be
six or eight years, ” Buffett explains, “ the United States has worth, as measured started consuming considerably more then it produces. It ’ s by the
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