European banks are already debating an alternative reserve currency to the dollar. But the scene painted by DEF is the more likely to happen, despite the manipulations of any government .
The prof is right - a long-run trade deficit is only possible if you have a long-run capital inflow of a similar amount. In order to buy imports, America must exchange dollars for foreign currency. The foreign firm then has to put these dollars somewhere. Each dollar must either be hoarded as notes, or reinvested in US dollar-denominated assets. Even if they just put it in a domestic bank, the bank must then invest it in US securities (e.g. govt bonds) to earn a return. So basically, almost all dollars used to buy foreign goods must eventually come back to the US as investment in dollar assets, or sit around as notes under people's beds. The former is vastly more commong than the latter. Regarding the value of the dollar, it is not the size of the trade deficit that matters, but the rate at which dollar holders are willing to exchange dollars for foreign currency. Quite apart from the theoretical argument, practical experience shows that the trade deficit is completely useless as a predictor of currency movements. America has had a large trade deficit for several decades, yet there have been long periods of extreme dollar strength, for example in the early-mid 80s, or the late 90s. If the trade deficit is so key, as Buffett says, how come the dollar had a huge rally during this period? The relative wealth of Buffett versus the professor is about as relevant as it would be if Buffett claimed 2+2=5 and a penniless street bum said "no it isn't, it's 4".
........in the sense that the current account deficit is worrisome. And that is why the administration is in talks with especially China to work on some balancing out trade relations. And what happens with the USD that US citizens pay with for imports is not important to the CURRENT (the one right now) account deficit as the effects of those re-investments of USD are delayed and wont effect the system in an instant. Additionally, the capital account looked way better some time ago and that helped overlooking the growing current account deficit. However, this year, billions flew into Europe and this one of the reasons why the USD declined against the EUR. We should not equalize the comments of one chairman of a university with all academic research and comments nor should we confuse a no-name Don Boudreaux with other nobel laureates such as Vernon Smith or Buchanan. It is very funny. There were times (during the tech bubble) when Buffett was much more criticized than now and he still came out as a winner because he was invested this whole year while many funds were on the side lines and totally missed the boat this year. Its very funny how some 1-contract technical trading guys in here try to doubt Buffetts insight into economics or wealth creation. Its similar than trying to tell Gates how to make an improvement in the networking capabilities of Windows=Trying to criticize a guy, who built up a huge empire and proved oversight and strategic thinking, for some nitty-gritty details is in my opinion short-sighted. Its Christmas time: Ask for glasses ;-)
FYI, many big foreign firms in countries such as China sell their USD against local currency not in the open market but to their central bank. (reason: FX restrictions in those countries or special domestic interests) Central Banks such as in China and Japan and other big nations have been huge buyers of USD and sellers of their own currency in order to keep their rates in line for protection of domestic producers. In thus, much of the USD gets held up and reinvested in the US much later. Another big factor is that there are now many international markets that are denominated in USD. Therefore, not all received USD by foreign firms flow back into the US but are invested in global markets (hint: the Eurodollar market in London). So, arguing that all USD American citizens spend on imports flow back into the USD in an instant is flawed and simply wrong. The trade deficit is a problem of real import/export imbalances of products and not of funds. And the US is not doing to good at the moment on that note. Its more prevalent in the US than in countries such as Japan or Germany, as the average American is more interested in low-cost products and is not often willing to pay for top quality. Low-cost products are not produced in the US anymore, hence, the alarming level of such imports. (which is of course mixed with car imports, and other products that the US is in need of (oil and what have you)).
One of the major reasons why the US dollar has remained strong despite huge outflows on the current account is that the countries with the big surpluses as a result of trading with the US - Japan, Germany, Korea, Singapore , Saudi and of course and now most importantly China- have had to re-invest their dollars somewhere. And US Treasuries were safe (the US Government is hardly likely to default) and interest rates were reasonable and they were and are liquid.. so they could remove their $s at any time.. Now many of these countries control their currencies against the $ so $ weakness is not too much of a problem - they sell their own currencies and buy dollars... Eventually the cycle must stop.. but it has been going since the 1980s . One thing for sure when it does I would not want to hold dollars as it is likely to be very quick, very painful and mean US interest rates will have to rise dramtically to reverse it.. When? Dunno...some shock event will probably tip the balance...
Where in the world is the USD strong??? I see an absolute weakness in the USD or are we living on different planets? I see my points made in the previous post supported in that the USDJPY and USD/Renmimbi exchange rate have remained stable over the past months (because of central bank intervention and fixed exchange rate management) whereass the EUR has grown extremely strong against the USD. IMO, its the result of the US trade deficit and the attractive European financial markets this year that have by far outpaced the US market, share price wise. For instance, the USD has not remained strong agains the Yen because of USD strength but because of a massive Bank of Japan intervention (they acted as huge USD buyers and Yen sellers). That is also seen in the Yen decline against the EURO.
Its interesting to note that Buffet for the first time has been buying foreign currencies and at one time (maybe currently) short the dollar. Buckle your seatbelt Dorothy, cuz Kansas, is going Bye Bye.
Buffett's wealth creation secret is to not pay taxes. Buy stocks, hold them forever, never pay tax on gains. Setup a trust and avoid estate tax. Then to deflect public criticism, complain about tax dodges of other people (ie. California prop 13) and generally suggest higher taxes for others. People are starting to catch on to Buffett's hypocrisy.