America’s Growing Trade Deficit Is Selling the Nation Out From Under Us.
our country’s “net
worth,” so to speak, is now being transferred abroad at an alarming
rate.
In the late 1970s the trade situation reversed, producing deficits
that initially ran about 1% of GDP. That was hardly serious,
particularly because net investment income remained positive. Indeed,
with the power of compound interest working for us, our net ownership
balance hit its high in 1980 at $360 billion. Since then, however, it’s
been all downhill, with the pace of decline rapidly accelerating in the
past five years. Our annual trade deficit now exceeds 4% of GDP.
Equally ominous, the rest of the world owns a staggering $2.5 trillion
more of the U.S. than we own of other countries. Some of this $2.5
trillion is invested in claim checks – U.S. bonds, both governmental and
private – and some in such assets as property and equity securities. In
effect, our country has been behaving like an extraordinarily rich
family that possesses an immense farm. In order to consume 4% more than
we produce – that’s the trade deficit – we have, day by day, been both
selling pieces of the farm and increasing the mortgage on what we still
own.
foreign ownership of our assets
will grow at about $500 billion per year at the present trade-deficit
level, which means that the deficit will be adding about one percentage
point annually to foreigners’ net ownership of our national wealth. As
that ownership grows, so will the annual net investment income flowing
out of this country. That will leave us paying ever-increasing
dividends and interest to the world rather than being a net receiver of
them, as in the past. We have entered the world of negative compounding
– goodbye pleasure, hello pain.
We were taught in Economics 101 that countries could not for long
sustain large, ever-growing trade deficits
However the dollar is the world’s reserve currency.
So US trade partners are quite willing to accept US IOUs.
How long can this continue? Perpetuity?
Buffett offers a solution which our leaders won’t do.
If the continuing trade deficit becomes a problem, I think it is likely we will print money like mad to pay back devalued dollars. That is a temporary measure as imports become more expensive. What to do?