Gates and Buffet wrong on dollar

Alex Tabarrok quotes Bloomberg reporting that Bill Gates and Warren Buffet are shorting the dollar out of concern for US budget and trade deficits.

Far be if for me to disagree with Warren Buffet on investment, but US government debt is not particularly high from a historical perspective, and it is hard to argue that current spending is particularly inefficient. Instead it represents a major investment in securing Iraq that may be risky but that has a large security payoff if successful. The dollar may be going down because much of the market is taking the other side of the bet, but that is the bet nonetheless.

The trade deficit argument is more interesting because it reflects the marginal willingness of foreigners to invest in dollar denominated assets. On the one hand, China and Japan have major trade surpluses with us. On the other, they appear to be proping up the dollar by using those funds to invest in US assets . This behavior is apparently mysterious (especially in the case of China) until one realizes that both China and Japan have major problems with aging populations. Via MinuteMan , I found this report from Brookings

In summary, a global perspective suggests that the problem of population aging is easier to manage than is implied by the common focus on closed economies. Drawing a comparison to the US – for a long time we thought that New England was getting old, and California was young, and then a deal was struck between them: New England invested in California. Why shouldn’t we think that the same process would occur globally?

In other words, the dollar stays up to the extent that the US is a uniquely safe place to invest in young people. Perhaps the dollar has gone down recently because the US has broadened its security umbrella to make it safe to invest in other younger countries or perhaps it has gone down because Europe is liberalizing trade and becoming a better place to invest.

In any case, there is no obvious crisis scenario here. Instead we have other places getting relatively more competitive for investment purposes.


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