Wednesday, January 30, 2008

Thriftville and Squanderville

I stumbled upon an interesting article written in 2003 by the "Oracle of Omaha". "Why I'm not buying the U.S. dollar" warns our nation about its expanding trade deficit, and proposes a policy control it. It's a little long, but I think it's well worth the read.

Here are links to the article and my archived copy:

To diverge a little, I'd like to talk about our national debt and relate it to a household mortgage. Currently our national debt is about $9.2 trillion. To put it in perspective I'd like to compare that against our national tax revenue. For FY07, this was $2.5 trillion. ( ) So I think I'm correctly calculating our Debt to Income 'front ratio' as 27%. That's right below the conventional limit of 28%. ( ) In other words, this would be the equivalent of a married couple with combined gross household income of $75k/year obtaining a mortgage of $275k.

Right now, I think our country's debt level is 'ok'. It's not great, but it's manageable. The problem is the rate of change of the deficit; it's increasing. Just as it is in Squanderville, excessive borrowing puts an unfair burden on the future generation of taxpayers. The United States has an incredible amount of collateral to back up our AmEx Platinum spending. There's no doubt we've got wiggle room and borrow at the best rates.

We just need to modify our policies to become more fiscally responsible because our margins are shrinking. From the consumer perspective, this means shying aways from buying quickly depreciating assets (like luxury goods) on credit. However, if we're talking about genuine ways to increase our country's value over the long term, I'm all for throwing in a few hundred billion dollars. Why not go for it?



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