Yes and Not Yes

Warren Buffett wrote an article for the November 10, 2003 Fortune about the negative consequences of America’s growing trade deficit. In the article, Buffett tells the story of the citizens of Squanderville and Thriftville. The citizens of Thriftville work hard to produce goods for which the Squanderville are willing to pay.

The Thriftville citizens accumulate a large amount of Squanderville bonds. The Thriftville citizens get nervous about the ability of Squanderville citizens to repay the IOUs, so Thriftville citizens decide to sell some of the bonds back to Squanderville and to use those proceeds to purchase Squanderville land, figuring that it would be harder for the Squanderville government to renege on physical land as opposed to paper IOUs. Pretty soon, Thriftville owns all Squanderville land.

America is Squanderville. Soveriegn wealth funds have been buying hundreds of millions of securities of American companies and American real estate. The New York Times has a recent story on how foreign investors are purchasing “trophies” and choice real estate. The recent purchase of the Chrysler Building by the government of Abu Dhabi is just one example. If we don’t want to be owned by foreign nations and we don’t want our grandchildren working to pay off our debts, per Bufffett’s advice we must attempt to correct the trade deficit.

But maybe we shouldn’t be worried. As Coyote Blog points out, America has experienced similar periods of angst, citing the 1980s panic of the Japanese buying up America. Nothing horrible happened then and perhaps nothing horrible will happen now.

Furthermore, Coyote Blog writes, “The fact is that holding our debt and owning US assets gives China (and other nations) a huge shared interest in our stability and continued prosperity.” This observation is true, but I still think we and our descendants are going to be working a lot harder and much longer in order to pay off our debts than if we had less debt.