March 10th, 2014
1. Is Warren Buffett’s decision to bet against the dollar a good one? Why or why not?
Yes Warren Buffett’s decision to be against thedollar is a good one. Buffett is betting that American trade deficit will not be restored and the country’s practice of borrowing from abroad to pay for the current goods and services will not stop. The USA borrows from abroad to finance its trade deficit, on top of that the USA government spends more money than it takes from taxes. The budget deficit increases the gap between country’s national savings and national income and and also widens the deficit in the current account by necessitating the country to borrow more money from other ...view middle of the document...
To finance some of the USA current account deficit, the USA embarked on treasury bond sales bought by foreign sources such as China and sovereign wealth funds and these sales lead to future interest payments to foreign accounts further increasing the USA current account deficit.
3. Is the U.S. current account deficit in 2005 sustainable? Is its continual widening a problem? Is it an economic problem? A political one? Is the United States headed toward crisis? Why or why not?
I don’t think the U.S. current account deficit in 2005 is sustainable because the U.S current account deficit is funded by foreign capital inflows. The increasing direct foreign investment in the U.S. cannot continue without control. If this process continue indefinitely because if it continiues the foreign investors will ultimately hold larger share of American assets in their investment than they crave because there is a limit to the “hunger” for the U.S. assets. The investment will be so huge that foreigners will panic about the ability of the U.S pay back this debt. I believe the continual widening of the current account deficit is a problem simply because in future the foreign investors will reach their limit in funding the U.S. current account deficit. When the foreign investors halt buying U.S. debt and the U.S. still have current account deficit, the country will run into a lot of problems. For instance if the dollar increases due to massive demand and increase in foreign investment in the U.S this can make the country’s (the U.S.) exports less competitive against their counterparts.
The widening of the current account deficit is both economic and political hurdle. A huge current account deficit will lead to depreciation of the dollar and the depreciation of the dollar causes inflation because the inexpensive dollar makes imported goods and services very expensive and this higher cost will be passed on the consumers. If the U.S wants to attract foreign investment to fund some of its current account deficit by...