Thriftville vs. Squadervill --- revisit

Warren Buffet had this story about trade deficit. Two countries called Thriftville and the deficit-spending Squanderville. Squaderville buys more from Thriftville than they are selling to Thriftville. The difference was paid by borrowing money from Thriftville. The debt is an IOU. That means Squanderville’s net worth had been transferred to Thriftville. It would be happy for both if this went on forever. However, he said, “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, business, office buildings. And eventually the Thrift own all of Squaderville.”

Buffet not only figured out the two hypothesis countries, but also proposed “Import Certificate” to balance trade deficits. That is hard to implement ‘cause it is a tariff. The resolution part is not related to our problem --- we can have millions of solutions but the problem still persists. The most fundamental question is if the IOU trustable or not. There is no written rule stating that Squanderville can’t devalue their IOU but mutual trading relationship should honor their own responsibilities.

It is not difficult to see who is Squanderville and who is Thriftville and what had happened in 1990s on Japan or what is happening now on China. Though Chinese are still committing buying more treasury bonds (Chinese need the US market but Japanese don’t as they don’t need it as needed as Chinese do), they started to question the value of these bonds overtly. With growing US deficit and Fed’s decision to buy more Treasurys by devaluating current ones, it is no doubt but just about time when Chinese and others would diversify their investments. That is exactly what Buffet has figuratively said about the less risky properties.

Expanding what Buffet said about ‘less risky properties’, we would include these as long term investment: land, business (in format of high grade corporate bonds), office buildings (in format of REIT), commodity (gold and oil), currency (Japanese Yen).