The Sharecropper Society

 When Warren Buffett speaks, people listen.

In this year's annual letter to shareholders, Warren Buffett warned that the U.S. trade deficit risks creating a "sharecropper's society" as a result of Washington's trade policies and the deeply depreciated value of the dollar.

Buffett expressed his concern about the U.S. trade deficit and the need to finance it with foreign investment, devoting more than two full pages of the Berkshire Hathaway annual report to the topic.

"[Last year] our country... purchased an additional $618 billion in goods and services from the rest of the world that was unreciprocated--and up 24.4% from the previous record of $495.6 billion in 2003. That is a staggering figure and one that has important consequences. The balancing item to this one-way pseudo-trade--in economics there is always an offset--is a transfer of wealth from the U.S. to the rest of the world. The transfer may materialize in the form of IOUs our private or governmental institutions give to foreigners, or by way of their assuming ownership of our assets, such as stocks and real estate. In either case, Americans end up owning a reduced portion of our country while non-Americans own a greater part.

"This force-feeding of American wealth to the rest of the world is now proceeding at the rate of $1.8bn daily, an increase of 20 percent since I wrote you last year," he said. "Consequently, other countries and their citizens now own a net of about $3,000bn of the U.S." In particular, he warned that this meant a sizeable portion of what U.S. citizens earned in the future would have to be paid to foreign landlords.

"This annual royalty paid the world," Buffet continued, "which would not disappear unless the U.S. massively underconsumed and began to run consistent and large trade surpluses--would undoubtedly produce significant political unrest in the U.S. Americans would still be living very well, indeed better than now because of the growth in our economy. But they would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an 'Ownership Society' will not find happiness in--and I'll use hyperbole here for emphasis--a 'Sharecropper Society'. But that's precisely where our trade policies, supported by Republicans and Democrats alike, are taking us."

Buffett expects the decline of the dollar to continue unabated, and the trillion-dollar deficits to continue being racked up. As he wrote last year, "A budget deficit in no way reduces the portion of the national pie that goes to Americans. As long as other countries and their citizens have no net ownership of the U.S., 100% of our country's output belongs to our citizens under any budget scenario, even one involving a huge deficit.

"As a rich 'family' awash in goods, Americans will argue through their legislators as to how government should redistribute the national output--that is, who pays taxes and who receives governmental benefits. If 'entitlement' promises from an earlier day have to be reexamined, 'family members' will angrily debate among themselves as to who feels the pain. Maybe taxes will go up; maybe promises will be modified; maybe more internal debt will be issued. But when the fight is finished, all of the family's huge pie remains available for its members, however it is divided. No slice must be sent abroad.

"Large and persisting current account deficits produce an entirely different result," argues Buffet. "As time passes, and as claims against us grow, we own less and less of what we produce. In effect, the rest of the world enjoys an ever-growing royalty on American output. Here, we are like a family that consistently overspends its income. As time passes, the family finds that it is working more and more for the 'finance company' and less for itself.

"Concern about foreign ownership of U.S. debt is twofold: 1) that it drains wealth away from Americans and into the hands of foreign investors, and more specifically foreign governments; and 2) the day may arise when payment on sovereign debt is refused, the cause of many past wars over the history of mankind. Is it beyond imagination for a future American president to claim 'national security' as the basis of such refusal? Our likely adversary this time: China."

Case in point: You only have to follow the current war dance between China and our Congress over the Asians' "menacing" UNOCAL bid.

Economically, we can agree with Buffett's views. Philosophically, we'd like to point out that "foreigners" are just people without a U.S. passport and not per se the enemy. In fact, that role is being masterfully played by some individuals within our own borders, namely those who work hard on shredding everything that is still good in this country, from the "old-fashioned" Constitution to traditional American values like life, liberty, and the pursuit of happiness without having to show your ID first.

We'd also like to think that not all Americans are harebrained, debt-accumulating credit card addicts who salivate like Pavlovian dogs when they hear about the annual JC Penney mega-sale. Therefore, "we are like a family" is an admittedly benevolent but entirely inappropriate metaphor--unless we're talking about a very dysfunctional family, the kind that, aside from sending the obligatory Christmas card, we'd rather try to forget the rest of the year.

But back to economics. Today U.S. corporations are arming China with all the financial tools necessary to challenge American hegemony, while government trade policies are allowing a massive transfer of manufacturing, intellectual property and American jobs to China. And if we try to backpedal from these policies, as Congress is attempting right now, we'll look like hypocrites, to say the very least.

So what's it going to be--put on a happy face and hand over our assets like good free-market sports? Or nipping the attempt in the bud, making a 180-degree turn from cheerleader of globalization to protectionist miser, thereby potentially triggering a trade war? Let's not forget the negative consequences of Smoot-Hawley in 1930.

Alternatively, people could stop asking the government to do, well, just about everything for them, reducing the size of the behemoth to a level where we don't need to go hat in hand to the rest of the world for our daily billions. Abolishing the Fed and letting interest rates go where private corporations think they should would also be a helpful albeit temporarily painful step. When you consider that the dollar has lost over 90% of its value since the creation of the Fed in the 1930s, questioning this institution's merit would seem justified.

If something doesn't change, as Doug Casey has previously remarked, some day our children may wind up as household helpers of wealthy Chinese families.

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Posted 07-19-2005 1:13 PM by Doug Casey
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