Buffett Weighs In on Dollar’s Decline, Sovereign Wealth Funds

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Warrren Buffett can usually be depended upon to tell it like it is, or at least as he sees it (most often the same thing). This year’s annual letter to Berkshire Hathaway shareholders does not disappoint in this respect. Amid the discussion of the company’s performance, he weighs in on variety of topical issues, including the decline of the dollar and the role of sovereign wealth funds:“When the dollar falls, it both makes our products cheaper for foreigners to buy and their products more expensive for U.S. citizens. That’s why a falling currency is supposed to cure a trade deficit. Indeed, the U.S. deficit has undoubtedly been tempered by the large drop in the dollar. But ponder this: In 2002 when the Euro averaged 94.6¢, our trade deficit with Germany (the fifth largest of our trading partners) was $36 billion, whereas in 2007, with the Euro averaging $1.37, our deficit with Germany was up to $45 billion. Similarly, the Canadian dollar averaged 64¢ in 2002 and 93¢ in 2007. Yet our trade deficit with Canada rose as well, from $50 billion in 2002 to $64 billion in 2007.

So far, at least, a plunging dollar has not done much to bring our trade activity into balance.

There’s been much talk recently of sovereign wealth funds and how they are buying large pieces of American businesses. This is our doing, not some nefarious plot by foreign governments. Our trade equation guarantees massive foreign investment in the U.S.

When we force-feed $2 billion daily to the rest of the world, they must invest in something here. Why should we complain when they choose stocks over bonds?

“Our country’s weakening currency is not the fault of OPEC, China, etc. Other developed countries rely on imported oil and compete against Chinese imports just as we do. In developing a sensible trade policy, the U.S. should not single out countries to punish or industries to protect. Nor should we take actions likely to evoke retaliatory behavior that will reduce America’s exports, true trade that benefits both our country and the rest of the world. Our legislators should recognize, however, that the current imbalances are unsustainable and should therefore adopt policies that will materially reduce them sooner rather than later. Otherwise our $2 billion daily of force-fed dollars to the rest of the world may produce global indigestion of an unpleasant sort.”

A couple of interesting omissions from the report: no discussion of the performance of Moody’s Corporation, widely criticized (along with other ratings agencies) for failing to adequately asses the risk of subprime-related derivative debt instruments . Berkshire owns 19% of Moody’s. Also no mention of the beleaguered monoline bond insurers and Buffett’s proposed solutions to their problems (including Berkshire’s planned entry into the industry).

 

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