Friday, October 7, 2011

Warren Buffett, the Ultimate Bubble, and American Decline

America is in the hands of con men.  Would that she were to return to the innovative days of laisser faire when the precursors of today's economic mountebanks resided in the populist hinterland and the fringe of the Whig and Republican Parties.  The Bush and Obama administrations have followed the failed ideologies of Friedman and Keynes as the American economy has faltered.  (A good discussion of why monetarist and Keynesian economists get it wrong is Henry Hazlitt's Economics in One Lesson.)  

In a 2003 article in Fortune  Warren Buffett, Oracle of Federal Reserve Bank Counterfeit, makes these claims:

 ...imagine that the Japanese both want to get out of their U.S. real estate and entirely away from dollar assets. They can’t accomplish that by selling their real estate to Americans, because they will get paid in dollars. And if they sell their real estate to non-Americans—say, the French, for euros—the property will remain in the hands of foreigners. With either kind of sale, the dollar assets held by the rest of the world will not (except for any concurrent shift in the price of the dollar) have changed. The bottom line is that other nations simply can’t disinvest in the U.S. unless they, as a universe, buy more goods and services from us than we buy from them. That state of affairs would be called an American trade surplus, and we don’t have one.

Mr. Buffett and Fortune mal-educate the public.  The foreigner who sells American real estate can exchange dollars for yen or yuan at his bank.  Fortune and Buffett seem not to have heard of foreign exchange windows. All currencies are traded.  Of course, if many foreigners wish to get out the dollar there will a great dollar crash.  This will occur, for the dollar, not gold, is the world's ultimate bubble.  

As well, foreigners can get out of dollars by buying commodities with dollars and then selling them for foreign currencies. For example, if a Japanese investor is holding dollars, he can use the dollars to buy gold or wheat from an American and then sell the commodity in Japan. That would leave dollars back in America and the Japanese investor with yen.  As well, he can purchase dollars from Americans who prefer to hold yen, or use dollars to purchase yen-denominated assets from Americans.  Side payments make a wide range of ways to ditch dollars possible.

The price of gold has escalated as both Americans and foreigners have begun to prefer holding gold to dollars. Foreign central banks increasingly hold gold instead of dollars.  The dollar has fallen.

Foreign central banks can end the dollar's reserve currency status and sell their treasury bonds back to Americans, then exchange the dollars they have received for their home or another currency.  Doing so would cause the dollar to fall as demand for dollars drops and demand for other currencies rises.  If many countries do so, the value of the dollar will fall precipitously.  That Mr. Buffett and Fortune claim that such a situation is an impossibility reflects the ruling class's fantasy that the current monetary arrangement, which is a dollar bubble brought about through central banks' and governments' planning in Wall Street's, corporations' and government's interests, can continue indefinitely.

Eventually, there will be a run on the dollar, and Americans will suffer.  Gold may have its ups and downs, but the instability of the American monetary system will remain until the system is replaced.

A dollar crash should have occurred long ago. All foreign trade must be two way.  If foreigners are selling merchandise here for dollars, then we must sell merchandise there for yen or yuan.  If we don't then demand for the dollar falls and we are forced to stop buying Japanese or Chinese merchandise because it has become expensive. Plants return from foreign countries because imports become expensive.  Inflation would make Americans poorer.  This has not occurred because foreigners hold dollars and dollar-denominated treasury bonds, propping up the dollar. This has caused excessive overseas investment.  The Fed has harmed working Americans while it has subsidized Wall Street, Warren Buffett, and George Soros.

Rather than think logically, Mr. Buffett, America's most talented financier, and Fortune, America's leading business publication, fantasize.  The notion that the dollar cannot be sold deflects attention from the instability of the American economy.  Fantasy is characteristic of participants in bubbles.  It is not impossible for foreigners to sell dollars, and purchase of manufactured goods is not the only form of trade.  As dollar demand for other currencies escalates, the dollar declines.

The flip side of Mr. Buffett's and Fortune's delusional claim that dollar sales are an impossibility will be the end of the dollar bubble--a dollar crash.  Gold and silver, anathema to Fortune, Mr. Buffett, and his Wall Street peers, will skyrocket in value.  Wall Street's victimization of the average American, accomplished by Americans' voting their victimizers' servants into office, will have been complete.


wil k. in Salem, OR said...

So maybe I am parochial and naive, but if this does in fact occur, and foreign investors reduce their holdings of dollars, what would the effect be on the "common American" who has little or no investments and very little savings. What could such an American do in preparation for such a bursting of the dollar bubble? Apart from commodities, is there any safe asset for someone unable to trade internationally? I am aware that you are not a financial advisor, but I would be curious about your opinions

Mitchell Langbert said...

Dear Wil--thanks for your thoughtful posts. The Federal Reserve Bank has harmed the average American for the past 100 years, and especially for the past 40 years, since 1970. Gold, commodities, real estate (but of course prices are inflated), hard assets, food, toothpaste, etc. are all ways to hedge a dollar decline. No one knows when the coup de grace of the American financial system will be; it could be in 50 years or in 2 years. Now that gold and silver are falling in price you might consider buying a bit. Wages tend to lag in inflationary times. If there is a dollar crash, having consumption items around the home will probably serve you well. I don't want to sound like a survivalist, but the low prices of manufactured goods won't last forever.