Why a trade deficit is bad

“Buffett had written an article for Fortune, “Why I’m Down On the Dollar,”20 in which he explained that he had made significant investments in foreign currencies out of a belief that the dollar would decline in value. The reason was something called the trade deficit: Americans were buying more from other countries than they were selling, and at a fast-accelerating rate. They were paying for the difference through borrowing; foreigners were buying Treasury bonds, an I.O.U. from the U.S. government. In short order, the country’s “net worth,” he said, “is being transferred abroad at an alarming rate.”

He posited a hypothetical example of two countries called Thriftville and the deficit-spending Squanderville: Sooner or later, the Thriftville citizens who were buying Squanderville Treasury bonds started wondering if Squanderville was good for the money. When that happened, they still traded with Squanderville—but instead of bonds, they took less risky hard assets: land, businesses, office buildings. “And eventually,” wrote Buffett, “the Thrifts own all of Squanderville.”

Excerpt From: Alice Schroeder. “The Snowball.”

Also published on Medium.