Is Warren Buffett Decision To Bet Against The Dollar A Good One

After watching the video " Ten Trillion and Counting", I found that the United States borrows money from China, Japan, Europe, and even Saudi Arabia. Borrowing money is something that the government shouldn't rely on for the incoming years because it has the chance of leading to national depression. They continuous borrowing from other countries will leave an immense debt to be payed off. When expenses increase the income yearly then a deficit will run. If those deficits add up then it will turnout as a debt. Although this is a lot money, most of that money is controlled by foreigners. Foreign countries are the highest holders of debt that the U.S. is against. "At the end of April, China alone held $1.1525 trillion of U.S. debt, and all foreign nations combined held over $4.4 trillion, about half of the total public debt. The remainder is split between a wide variety of businesses and individuals around the country and the world (Gofman)." America is low on taxes that and the way balance that problem is to have lend some money.

This growth in national debt has blunt consequences on inflation, interest rates and growing economy. Foreign control of large amounts of government debt means that the taxes will have to be raised to repay debt and percentage owned to overseas governments which is not acceptable. Assuming that trade deficiency also exists it will lead to depreciation of dollar which effect its position as a reserve currency, and if during this process any new currency emerge as a replacement of reserve currency, higher interest rates will be required to sell the debt to foreign countries (Inflation). Raised interest rates have a negative impact on the economy and high accumulation of debts leads to high interest rates (Spending). Hence the economy suffers. This means that the funds for government programs like Social Security and Medicare are not enough (Economic Progress Under Obama). Another consequence of high national debt is the reduced flexibility in fiscal policy (Spending).

"China is more than happy to own a large portion of the U.S. debt," as this gives it great economic clout within the international market (Amadeo, 2012). This power has the potential to seriously damage the American economy if the nation was to suddenly dump its American loan holdings. If this were to happen the value of the dollar would drop dramatically, domestic interest rates would spike, and the United States would be left standing alone to try to pick up the pieces.

The author states in the second paragraph of his essay that, “Under current law, when the feds…. make a loan, the size of the U.S budget deficit rises, and the government borrows additional funds, very often from foreign investors.” (Vedder, 170) The problem is that we as a country are in too much debt to be paying for other people’s debt who have the capability to pay it off on their own. A good solution for the problem could be to have people send in monthly reports of

“Today I face you and say the challenges are real. They are serious and many,” Obama stated on inauguration day. Obama need to pull things together with bold and quick actions. Yet it seemed that borrowing was the only answer to this out of control situation. And he did just that, taking hundred of billions to bail out the banks and other institutions; tens of billions more for the auto industry; $275 billion for homeowners and the mortgage lenders; and $787 billion stimulus package to jump-start an economy spiraling downward. Much like the Bush administration, Obama and his administration are borrowing just as much, added to the deficit. It is unclear what exactly the future will look like for America as the economy is spiraling downward and other countries are becoming stronger.

In the long term the increase of foreign debt can lead to a debt sustainability problem, if Australia becomes overwhelmed with debt the economy will find it hard to service current debts. If the size of the debt is rising faster then the increase of GDP the interest payments on the debt will progressively

They now exhibit a challenge in terms of debt, deficit and surplus. The national debt and deficit possess distinct definitions. The budget is the amount of money that the government works with within a given fiscal year and allocates to the different programs. The deficit is when expenditures exceed revenue and is added to the debt at the end of the year. In the last ten years we have experienced enormous deficits that may communicate to the international community that the United States might have trouble producing a balanced budget. This is an accumulative effect as the national debt is combined with the debt held by federal securities outside and inside the government and the public. Foreign country debt is included in the national debt as of March 8th tops $16 trillion dollars. Debt owed to foreign countries like China and Japan equates to a little over $1.1 trillion. Yet, despite the United States’ owing large amounts we are still considered financially sound because of our credit rating. According to Thompson from CNN Money, the United States’ credit rating is in jeopardy of being downgraded because of a weak debt ceiling (Thompson, 2013). This may increase the risk level of investing in the United States.

The United States of America has carried some amount of federal debt every year since the country was founded. From this empirical evidence, it can be said that debt itself is not damaging to an economy. After all, the country has had periods of rapid growth and economic booms while carrying different amounts of debt. It is also plain to see that a very large amount a debt, an amount that could not ever be eliminated without unreasonably inflating the dollar, could have devastating effects. The US dollar is a fiat currency, which holds value only when holders of the currency have confidence in the issuing institution, in this case the US government. In the event the government could not repay its debts, the value of the currency would drop as people lose confidence. The effects on the US economy, households, businesses, trading partners and foreign governments would be disastrous and widespread.

The financial crisis of 2008 has been described as the worst financial crisis the world has seen since the great depression, but there are now murmurings of the potential for an even greater financial crisis, a currency crisis, caused by the demise of the US Dollar. The Dollar has been the reserve currency of the world since it took over from the Pound at the end of world war two, but we examine if it is about to crash spectacularly?

Mr. Emanuel, in the current economic climate, the Obama administration’s course of action has been to pursue aggressive countercyclical fiscal policies designed to prevent further economic deterioration. Critics of these policies argue that:

There are many reasons why the dollar would fluctuate. The strength and weakness of a dollar depends on a number of factors such as inflation and trade deficits. To save the economy from inflation, the Federal Reserve will increase interest rates causing the economy to slow and the value of the dollar to decrease. Trade deficits can also devalue the US dollar. Although the high trade deficit is causing the dollar to fluctuate, the deficit could be a way to make the dollar stronger. Because we are borrowing from other countries, with our interest rates being higher, they would want to buy the US dollar to invest in the interest rate market.

In examining the United States economic health, it is important to consider the current account deficits. The question as to whether or not the United States can run the current deficit accounts indefinitely. Looking at the EU and its balance of payments, the question arises again as to whether or not they can maintain the deficits they are experiencing, indefinitely. Globally speaking, the United States does hold a unique position, but does that position allow the country the ability to consistently run the deficits it currently maintains.

Furthermore, the nation will go deeper into debt with the rest of the world as Americans continue to rely on the strong flow of foreign money, particularly from central banks in Asia, to finance the trade gap. China, Japan and other foreign governments are some of the biggest holders of government securities, lending money to cover the substantial federal budget deficit and helping to keep interest rates and home mortgage costs here relatively low. As a result, American consumers are able to spend more and save less.

Likewise, Edwards (2005) suggests that “since the U.S. current account deficit poses no threat, there are no fundamental reasons to justify a significant fall in the value of the dollar” (p. 212). Bertaut, Kamin, and Thomas (2009) observe that “with the real multilateral

Current Account Deficit. A rise in the ratio of the current account deficit to GDP is generally associated with large external capital inflows that are intermediated by the domestic financial system and could facilitate asset price and credit booms. A large external current account deficit could signal vulnerability to a currency crisis with negative implications for the liquidity of the financial system, especially if the deficit is financed by short-term portfolio capital inflows. Financial crises that have