Econ 101: Warren Buffet on the US Dollar
Nov 20th, 2007 by nancyzimmerman
Like many Canadians, I muse about the future of the Cdn dollar relative to the USD. Four years ago, Warren Buffet gave his opinion – prescient, per usual. If you haven’t yet read him, this is a wonderful introduction. The reading really gets going when he starts describing Squanderville and Thriftville, as illustrative of economies.
Imagine Thriftville and Squanderville as two islands, he says. They have very simple economies – consuming only exactly what they produce. Each resident works 8 hours a day to produce, and consumes 8 hours/day worth of items.
Years go by, then: innovation! Thriftville residents begins working 16 hours per day, but still consume only8 hours/day worth of the items. What do they do with all the other 8 hours/day worth of goods? They ship it over to Squanderville, in exchange for paper IOUs from Squanderville. Squanderville is ecstatic – they get to stop working altogether, and yet continue to consume the same amount as always!
This carries on swimmingly until both Thriftville and Squanderville get a little uneasy. Thriftville starts to wonder, “will Squanderville pay us back for all our hard work?” and Squanderville, now a couple generations later, starts to think, “Thanks Mom and Dad. Thanks so much — you’re dead and gone, but I’m stuck holding your lousy IOUs! Glad you enjoyed a lifetime of meals on me!”
Tensions rise. Buffet offers a possible solution, but I think the Econ 101 paragraphs are his (more detailed than I gave) descriptions of the two islands.
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Buffet’s “solution” (import tariffs that make it harder for other countries’ industries to sell to America) is another scenario of US cheating and behaving in a way that other countries can’t (because they don’t have the size to bully through their own selfish “solutions”).
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One of my parents’ friends once remarked with pride how their generation had built a lot of infrastructure, how they had raised the living standard in Denmark, etc. I said thanks, and then pointed out that they hadn’t paid for it: It would be up to my generation to pay the national debt they accumulated.
Meanwhile my generation had gotten rich because of inflation and real estate circumstances that left every shack-owner well off.
At least in the case of Denmark, the clamp down on the Squanderville behavior came early enough that their generation got to help with some of the paying, but it also cut dramatically into the living standard for the younger generations, the educational system, child care, etc. (all the stuff that the post-war generation didn’t need
Tx for providing an international perspective. You know, I’m no economist, but when I read your post, I couldn’t help but wonder: most 1st world countries struggle with the same issues. I’m surprised that between the lot of us, we haven’t figured more stuff out!