Sterling takes a royal pounding - FT.com

Summary:
In the UK, high borrowing costs, a painful housing market correction and losses in the financial sector mean most of the UK's assets have been dramatically revalued down. Sterling has suffered as a result. However, was overvalued. Sterling s likely to fall further in the long run, as the North Sea fields wind down and the UK imports more oil and gas. Questionable government schemes have reduced confidence in the pound. Bank of England, needs to worry about weaker pound, not government. The MPC must now contend with rising import costs. Weakness of sterling means the Bank will need tighter monetary policy than would otherwise be necessary to bring inflation back down to the target of 2 per cent from its August level of 4.4 per cent. (Published: 03/09/08)

Summary:

• UK is exposed in three ways to the aftermath of the credit squeeze
• has heavily overvalued housing
• has most indebted consumers in the world
  
• has an economy that is peculiarly reliant on financial services
• high borrowing costs, a painful housing market correction and losses in the financial sector mean most of the UK's assets have been dramatically revalued down
• Sterling has suffered as a result
• is now trading at levels closer to those it plumbed in the aftermath of Black Wednesday than to the highs of last summer
• shift was inevitable: pound was overvalued last year
• moving away from growth based primarily on consumer and business spending at home to an equilibrium that encourages more exports is a necessary correction
• on a real trade-weighted basis, the pound is now at its historic average
• is likely to fall further in the long run
• as the North Sea fields wind down and the UK imports more oil and gas
• big danger is that a weak government will resort to more of the panic measures that have done such damage to confidence in the UK over the past 12 months
• Bank of England, needs to worry about weaker pound, not government
• the MPC must now contend with rising import costs
• weakness of sterling means the Bank will need tighter monetary policy than would otherwise be necessary to bring inflation back down to the target of 2 per cent from its August level of 4.4 per cent

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In search of a more dynamic economy - FT.com

Summary:
Edmund Phelps (Columbia University, 2006 Nobel prize in economics) on the causes of the employment downturn. Present downturn not due to a shift in aggregate demand, but the result of structural shifts in the economy. Usual response of gearing the money supply to attempt to prop up employment would generate ever-rising inflation. Structural shift is the result of a number of forces impacting on the economy, through non-monetary channels: loss of construction jobs due to end of housing bubble, overextension of credit and bad loans on the books of banks, perception of productivity slowdown and steeper prices of imported oil and commodities. Last three forces increase the shadow price of additional units of business assets. Forces act through an additional channel: exchange rate. When asset prices drop, resulting declines in plant and equipment demand and in consumer demand weaken the real exchange rate. Stimulates exports, but also shields domestic firms from overseas rivals, acting more like monopolists. Jobs may suffer as a result. Prospects: there will be a bout of inflation. Employment will be weak. Much investment will go abroad. Innovation may hold up. Phelps believes we need an economy of even greater dynamism to regain prosperity. (Published: 21/07/08)

Notes:

• employment downturn
• usually due to fall of aggregate demand
• if true, problem could be addressed at zero cost through rate cuts and the ensuing rise in the money supply
• present downturn is probably the effect of structural shifts in the economy, not a shift in aggregate demand
• forebodings of "stagflation" - lower employment without the solace of lower inflation
• gearing the money supply to attempt to prop up employment would generate ever-rising inflation
• inflation expectations would break loose from their moorings and the attempt would fail

• What are the primary forces of a structural nature?
  
• And, crucially, what are the non-monetary channels through which these forces have structural impacts on the economy - on the size of the labour force and the natural rate of unemployment?
1. Loss of construction jobs due to collapse of housing bubble
   
• the thirst to own more houses has been met and boom come to an end
• market is giving back the excessive part of the rise in real house prices - the part not justified by rentals
  
• home building must then subside to the level needed to replace old properties and house fresh increases in population
• construction workers and loan officers will then suffer job losses even as market prices and rentals on houses remain high
• ongoing slide in prices is causing a further structural contraction in the demand for labour in the housing and banking industries
• with the loss of jobs in construction, which is extremely labour-intensive, a net reduction in total employment must result, since a full re-employment elsewhere would require wage cuts that would exceed what some workers would accept
2. Overextension of credit, largely subprime mortgages, and loans of declining and uncertain value on the books of the banks
• result is a reduced capacity to lend for business investments and
  
• general increase in the uncertainty premium that is required on loans for innovative projects
3. Perception of a productivity slowdown during the past couple of years
• this damps companies' expectations of the productivity growth they might obtain from any new methods or products.
4. Steeper prices of imported oil and commodities
   
• may also cost jobs.
  

• These last three forces all lower the value, or "shadow price", that businesses place on having one additional unit of their business assets
  
• the customer, trained employee and office space
• effect is to cut investing and further lower real wages and jobs

• Same forces exert structural effects through an additional channel in open economies: the exchange rate
  
• When asset prices drop, resulting declines in plant and equipment demand and in consumer demand weaken the real exchange rate.
  
• Higher prices on foreign oil and commodities weaken the exchange rate very directly.
• Exports are stimulated.
  
• But: domestic companies, now better shielded from overseas rivals, will act more like monopolists
• raising their mark-ups and cutting their supply
• jobs may suffer
• exchange rate effect is not yet fully realised
• suggests that the unemployment rate is still short of its newly increased medium-term natural level
• if so, monetary policy in the US is odd
• past policy was to set interest rates higher, not lower, when the unemployment rate was seen as below its medium-term destiny

• We will have a bout of inflation. Employment will be weak. Much investment will go abroad. Innovation may hold up. Yet I believe we need an economy of even greater dynamism to regain prosperity.

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China's Export Machine Threatened by Rising Costs - The Wall Street Journal

Summary:
Manufacturers in China are seeing their profits dwindle. Raw materials and energy are more expensive, the yuan has strengthened almost 20% against the dollar, and there is tougher protection for workers and the environment as the government tries to make the economic growth more sustainable. Price of Chinese goods in US have surged 4.6% in May from the previous year. Manufacturers of low-cost products, which have been a key engine of China's economic miracle, are hardest hit. Growing realization in China that the country has relied too much on cost-cutting and simple production models to boost exports. China entering a more mature phase in its economic development? Will nevertheless remain an export powerhouse for many years, as the country also supplies industrial machinery and other higher-value products (less vulnerable to factors such as rising wages), and possesses infrastructure that few other developing countries can match. (Published: 30/06/08)

Notes:

• Manufacturers in China say their profits have dwindled
  
• they pay out more for raw materials and energy
• China's strengthening currency has made products more expensive for important markets such as the U.S.
• In July 2005, China bowed to pressure from global trading partners to ease its rigid grip on the yuan's exchange rate
• currency had been effectively pegged to the dollar for a decade, despite China's bulging trade surplus
• had created stability for exporters and their foreign buyers
• but: also angered Western critics who felt it gave Chinese factories an unfair advantage by keeping their prices low in dollar terms
• yuan's appreciation was slow at first, but last year it accelerated
• currency has now risen 20% in value against the dollar
• yuan has been losing value against the euro, on the other hand, making Chinese goods more affordable in Europe
• but: the advantage hasn't been enough for many manufacturers to offset other difficulties.
• price of Chinese goods in US surged a record 4.6% in May from the previous year
• Foreign buyers, used to inexpensive Chinese products and nervous about economic weakness at home, are often refusing to pay more.
• government's tougher protection for workers and the environment has also made it more expensive to do business
• part of Beijing's plans to support economic growth that is sustainable and modern, not merely fast.
• introduced this year: labor law that capped factory overtime, limited temporary employment and raised the minimum working age two years, to 18
• blow to small operations that traditionally hired and fired with each production cycle
• environmental oversight tightened: dyeing companies must now pay to dispose of the chemicals they use, instead of dumping them into the creeks that run through town
• Foreign buyers say tighter visa policies have made it harder for them to visit Chinese factories or attend trade shows
• none have been hit harder than the companies that feed the vast global appetite for inexpensive goods such as toys, household goods, shoes and clothes
• manufacturers of low-cost products have been a key engine of China's economic miracle
• helping to turn the country into the world's No. 2 exporter after Germany
• for years, these companies continued to grow by expanding their volumes and trimming margins to undercut the competition
• as material and labor costs rise and China's currency strengthens, these manufacturers are among the least able to absorb the costs.
• many manufacturing centers have seen hundreds if not thousands of factories and workshops close in recent months
• While painful, such difficulties could usher in a more mature phase of China's economic development.
• e.g. country's sweater industry, like many others, is arguably overbuilt
• In such low-cost sectors, analysts predict a coming wave of consolidation that could boost efficiency.
  
• They say companies will also be forced to innovate so they can compete on factors other than price.
• Many Chinese economists and officials think the country has relied too much on cost-cutting and simple production models to boost exports
• high dependence on foreign trade is not good for China
• for the U.S. and Japan, trade is equivalent to around 20% the value of gross domestic product.
  
• For China, it is about 75% of GDP.
• However: China is sure to remain an export powerhouse for many years.
  
• Export figures from China remain strong because the country also supplies industrial machinery and other higher-value products that are less vulnerable to factors such as rising wages.
  
• Plus, the country's roads and ports, and its spectrum of suppliers and businesses that support manufacturers, are a draw that few other developing countries can match.
• China's domestic market of 1.3 billion people is attractive for companies that want to both export and sell within China
• survey late last year by the American Chamber of Commerce in Shanghai and consulting firm Booz Allen Hamilton:
• 83% of the responding companies said they planned to keep their production in China.
  
• But: with rising costs weakening China's appeal as a manufacturing location, some 17% said they would shift at least some operations to other low-cost countries
• e.g. India and Vietnam

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The euro: how happy a birthday? - FT.com

Summary:
Mike Wickens (York). Argues introduction of euro has not achieved its goals. Inflation rates have not diverged, but ouput and inflation are not converging. Problem with a one-size-fits-all policy. In part due to inflexibility in fiscal policy imposed on members, in part due lack of labour mobility. Single market legislation has produced single market in goods and capital, but little progress in single labour market. Main difference with US or regions within e.g. UK. Need single labour market. But movement of labour in Europe causes tensions. Completing single labour market controversial and may deter countries like UK from joining. (Published: 05/06/08)

Notes:

• ECB has maintained average eurozone inflation between 1.6 and 2.5 per cent since 2000
• growth of prices and output
• for EU as a whole: both about 15%
  
• but: wide discrepancy among member states
• Ireland: 31% and 44%
• Germany: 5% and 11%
• UK: 18% and 20%
• the higher a country's inflation on joining the euro, the greater has been the price level rise thereafter
• inflation convergence observed before the euro has not therefore continued since
• How much of this is due to the "one-size-fits-all" monetary policy?
• setting a single nominal interest rate for all eurozone countries implies that high inflation countries have a low - even a negative - real interest rate, while low inflation countries have a higher - and positive - real interest rate
• the lower the real interest rate, the higher is economic activity and hence inflation
• therefore, we would expect output levels and inflation rates to diverge
• But as inflation rates have not diverged either, this explanation cannot be the whole story.
• Having a more rapidly growing price level implies a loss of competitiveness.
  
• This, together with higher output, may be expected to raise exports from lower to higher inflation countries, thereby reducing economic activity in high-inflation countries and increasing it in low inflation countries.
  
• conventional view is that these effects will be strong enough to act as an automatic corrective to the divergence otherwise inherent in having a common monetary policy
• has not happened
• may have prevented inflation rates from diverging, but it has not resulted in inflation and output growth rates converging as required in a successful currency union
• not fault of ECB: remit is aggregate euro area inflation, not that in member countries
• what can be done?
  
• short-term and long-term solution
• short-term: countries need more flexibility in the conduct of their fiscal policy
• only macro-economic policy instrument left to stabilise their economies in the short term is fiscal policy
• control of their interest rate and their exchange rate given up
• need ability to adopt different rules from those in the stability and growth pact
• correct framework for fiscal policy is to tax-finance permanent expenditures and debt-finance temporary expenditures
• non-cyclical expenditures, such as those on health and education, should be financed through taxation, but additional cyclical expenditures, like unemployment benefits, should be debt-financed
• no matter the size of deficits in business cycle slowdowns, countries should be allowed to finance them through debt
  
• provided the additional debt is paid off during the good times
  
• long-term: raising productivity and completing the single market
• more difficult to achieve and more controversial
• Improving productivity requires using the eurozone's advantages in human capital to innovate in new products and processes.
  
• This must be coupled with moving out of economic activities in which competitiveness has been lost and into new activities that give a temporary monopoly that is exploitable in world markets which would result in benefits to all countries.
• single market legislation has helped produce a single market in goods and capital, but there is little or no progress in creating a single labour market
• problems brought about by a one-size-fits-all monetary policy also apply to the states of the US and the regions of the UK but, because of labour mobility, are manageable
• recent tensions brought about by recent movements of labour in Europe show that completing a single labour market would be highly controversial and might further deter the UK and other countries from joining
  

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There is no excuse for Britain not to join euro - FT.com

Summary:
Willem Buiter (LSE) says case for Britain adopting the euro has never been stronger. Macroeconomic stability, the defence of London's status as a global financial centre and the political logic of deeper European integration all call for the dumping of sterling and adoption of the euro. (Published: 02/06/08)


Notes:

• case for the UK shedding sterling and adopting the euro has never been clearer
• From a conventional macro-economic perspective, no reasonable argument for a small, highly open economy like Britain's to retain monetary independence
• for economies with a high degree of international financial integration, the exchange rate does not act as a buffer against asymmetric shocks
• i.e. permitting an easier adjustment of international relative prices than under an irrevocably fixed exchange rate.
  
• instead it becomes a source of unnecessary noise and volatility.
• best way to deal with asymmetric shocks is to smooth national consumption by increased portfolio diversification and cross-border labour mobility
• international portfolio diversification is aided by the reduced exchange rate risk that comes with membership of the euro area.
  
• joining Schengen, the European border-free travel area, would boost the ability of labour to adjust to economic shocks
• UK's large financial and banking sector conducts much of its activity buying and selling financial instruments denominated in foreign currencies, not in sterling
• UK has massive gross external liabilities and assets
  
• well over 400 per cent of annual gross domestic product each
• compared with less than 100 per cent for the US and 700 per cent for Iceland
• UK as a giant hedge fund: highly leveraged entity borrowing shorter than it lends and invests
• has a lot of short-maturity foreign-currency-denominated foreign liabilities and illiquid, non-sterling denominated foreign assets
  
• not a bad way to make a living, but means country needs a lender of last resort and market-maker of last resort
• has one for sterling-denominated financial instruments: Bank of England (after malfunctioning at the onset of the credit crisis in August 2007) now performs this role effectively
• however, B of E cannot print euros, dollars, Swiss francs or yen
• cannot be an effective lender of last resort, or market-maker of last resort, if UK banks find themselves unable to roll over their non-sterling-denominated short-term liabilities or unable to sell their foreign-currency-denominated assets in illiquid international wholesale markets
• to deal with either problem, the Bank would be dependent on the goodwill of other central banks, through swaps and credit lines in foreign currencies
• they would have to be willing to buy sterling when the markets are yelling: "sell it"
• would be possible, but an (unnecessary) risk
• main question is whether the UK is more like the US and euro area or like Iceland
• more like Iceland:
  
• only the US and the euro area have serious global reserve currencies, with about 63 per cent and 27 per cent of the global stock of reserves respectively.
• Sterling, with about 5 per cent, no longer plays with the big boys and girls
• countries that want a large, internationally active banking sector and financial system need a serious global reserve currency to provide the lender of last resort and market-maker of last resort services required to limit the risk of a bank run or liquidity crunch bringing down their banking system
• it is possible to run a large financial sector with a local currency such as sterling or the Icelandic krona, but it involves taking an unnecessary and costly risk
• sooner or later that risk will be reflected in the cost of capital and render the country uncompetitive
• if London wants to remain the world's financial capital, there is only one choice for the UK: adopt the euro now and wonder why it did not do so in 1999
• political arguments for joining the euro area:
• future of Europe is federal and euro is a symbolic step towards deeper political integration
• UK can continue acting as it has since the European Union (or its predecessor institutions) was created:
  
• stand on the sidelines, snipe, join late and reluctantly and then moan about how things are turning out
  
• or it could be at the heart of Europe, shaping its institutions
• UK punches below its weight because it is not a full member of the EU: if you are not in the euro group, you do not count
  

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Britain is Better Off Outside the Euro - FT.com

Summary:
Martin Wolf giving some reasons why Britain is better off outside the euro. Whether the UK meets arbitrary economic tests at a particular moment is irrelevant. What is right today may be wrong tomorrow. Britain needs the ability to increase short term interest rates in order to restrain the growth of credit. Exchange rate flexibility has not led to price instability. There is no evidence that being outside the eurozone has imposed a performance penalty upon the UK economy. Argument against joining mainly economical, but also part political. (Published: 29/05/08)


Notes:

• Lex column last week: UK close to meeting the economic tests for joining; only obstacle to entry is political
• Martin Wolf disagrees:
• Whether UK meets arbitrary tests at a particular moment is irrelevant
  
• What is right today may be wrong tomorrow.
  
• If country is to join eurozone, its people must be willing to cope with the consequences forever, however unpleasant they may sometimes be.
• At present exchange rates, entry looks more plausible than for the past 12 years
• implied rate of old D-Mark against the pound was 2.46 on May 23
• well below the rate at which sterling was put in the old exchange rate mechanism in 1990
• Proponents of joining claim UK is paying price for staying outside euro zone
• real central bank intervention rate has averaged 3.2 per cent in the UK since 1999, against just 1.4 per cent in Germany or even negative levels in Ireland and Spain
• these relatively high short-term rates have also pushed longer-term rates above levels in the eurozone
• Arguments not compelling
• not long ago some argued that the fact that sterling had been so stable against the euro from early 2003 to late 2007 was a reason for joining
• now people argue that sterling should join the eurozone because it is weak
• all this shows is that the equilibrium exchange rate varies
• the rate that made sense when the world was willing to finance the UK's property-related borrowing spree no longer does so today
• high short-term real interest rates were needed to contain the growth of credit
• if UK had been a member of the eurozone, with lower interest rates, both credit growth and the economy would have been stronger, domestic inflation higher and real short-term interest rates possibly even negative
• would be no offsetting stimulus from the fall in the exchange rate as there is at the moment
• sterling has fallen by about 14 per cent against the euro since last August
• to achieve the same gain, Spain, now struggling with the end of a far bigger property-related boom, would need an annual rate of increase in unit labour costs a percentage point lower than in its eurozone competitors, for a good 15 years
• advantages of exchange-rate flexibility need not go with worse price stability
• between 1998 and 2008, consumer prices will have risen by just 18 per cent in the UK, the same amount as in Germany and below the 20 per cent rise in France and 26 per cent in Italy
• because sterling has fallen against the euro, the domestic price level will rise in the UK relative to the eurozone
• provided the Bank of England is determined to prevent pass-through to domestically determined prices, this should not endanger low inflation to any significant extent
• no evidence that being outside the eurozone has imposed a performance penalty upon the UK economy
• between the first quarter of 1999 and the first quarter of 2008, UK economy expanded by 28 per cent, against 21 per cent in the eurozone as a whole and 16 per cent in Germany
• no evidence that Emu has improved the economic dynamism of its members
• if anything, membership seems to have reduced the pressures for reform.
  
• The proposition then is fundamentally an economic one:
  
• remaining outside the euro preserves the safety valve of currency flexibility, while losing nothing in aggregate economic performance.
  
• Being outside has not even hurt London's position as a financial centre.
• Big proviso is that the Bank of England continues to fulfil its mandate
• might now require a period of much slower growth, or even a recession.
  
• but long-lasting slowdowns in particular economies are just as likely (probably even more likely) inside the eurozone
• Proposition is also political:
  
• inside a currency union, years of slow growth will occasionally be needed if relative costs are to come back into line
• there are countries in which it is possible for politicians to sell this proposition.
  
• Spain and Italy may be among them.
  
• Not UK.
  

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Squanderville versus Thriftville (2003) - Fortune Magazine

Summary:
Warren Buffet, writing in 2003. Predicts the dollar will decline in value and is therefore buying foreign currencies. Decline will have serious consequences for US economy. Growing trade-deficit is to blame. Explains this by means of tale: Squanderville vs. Thriftville. Thriftville owning Squanderville bonds. Government devalues Squanderville national currency to reduce value of IOUs (bonds). Thriftville sells bonds and buys Squanderville assets (direct ownership) with proceeds. Ends up owning all of Squanderville. One generation of Thrifters gets a free ride for which future generation pay (rent, interest) in perpetuity. Story similar to that of US since late 1970s. Declining dollar value not the solution. Buffet proposes system of Import Certificates in order to rebalance trade. (Published: 10/03)

Notes:

• Buffett: "Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in - and today holds - several currencies. It is largely irrelevant which currencies they are. What does matter is the underlying point: to hold other currencies is to believe that the dollar will decline. Both as an American and as an investor, I actually hope these commitments prove to be a mistake. Any profits Berkshire might make from currency trading would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar."
• our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate
• a perpetuation of this transfer will lead to major trouble
• see tale of Squanderville and Thriftville
• Tale of Squanderville and Thriftville
• two isolate, side-by-side islands of equal size
• land only capital asset
• communities primitive: need only food and produce only food
• working 8hrs/day, each inhabitant can produce enough food to sustain himself
• each society self-sufficient if everybody works 8hrs/day
• Thriftville citizens decide to do some serious saving and investing
• start to work 16hrs/day
• continue to live of food produced in 8hrs, and export remainder to Squanderville
• Squanderville citizens decide to live their lives free of toil and eat as well as ever
• pay Thrifts with bonds
• bonds at their core represent claim checks on the future output of Squanderville
• a few Squanderers smell trouble coming but are ignored
• the debt Squanderville is piling up will eventually require them to work more than 8hrs/day
• Thrifts begin to get nervous
• question the value of the Squanderville IOUs
• sell most of the bonds to Squanderville residents for Squanderbucks
• use proceeds to buy Squanderville land
• eventually the Thrifts own all of Squanderville
• Squanderers have nothing left to trade
• must return to working 8hrs/day in order to eat
• must also work additional hours to service the debt and pay Thriftville rent on the land imprudently sold
• Squanderville has been colonized by purchase rather than by conquest
• present value of the future production of Squanderville must forever ship to Thriftville
• can be argued that both have received a fair deal:
• equates the production Thriftville initially gave up
• however, dramatic "intergenerational inequity" has arisen
• one generation of Squanderers got a free ride and future generations pay in perpetuity for it
• Squanderville government facing ever greater payments to service debt
• sooner or later will decide to embrace highly inflationary policies
• i.e. issue more Squanderbucks to dilute the value of each
• Squanderbonds are simply claims on specific numbers of Squanderbucks, not on bucks of specific value
• making Squanderbucks less valuable would ease the island's fiscal pain
• in response, residents of Thriftville opt for direct ownership of Squanderville land rather than bonds of the island's governement
• most governments find it much harder morally to seize foreign-owned property than they do to dilute the purchasing power of claim checks foreigners hold
• "Theft by stealth is preferred to theft by force"
• comparison with US
• 1945 - ~1970: operated in industrious Thriftville style
• regularly selling more abroad than purchased
• invested surplus abroad
• net investment increased
• i.e. holdings of foreign assets less foreign holdings of US assets
• country's net worth consisted of all the wealth within borders plus a modest portion of the wealth of in the rest of the world
• late 1970s: trade situation reversed, producing deficits
• running initially at ~1% of GDP
• net investment income remained positive
• net ownership balance hit its high in 1980 at $360b, due to power of compound interest
• since then downhill
• pace of decline rapidly accelerating
• 2003:
• trade deficit exceeds 4% of GDP
• US consuming 4% more than it produces
• roughly equal to $500b per year, at this rate
  
• net foreign ownership of $2.5tr
• rest of the world owns $2.5tr more of the US than US owns of other countries
• roughly 5% of national wealth (~$50tr)
  
• some of this $2.5tr investested in claim checks (US bonds, both private and governmental)
• some of it invested in assets, e.g. property and equity securities
• at current trade-deficit level (4% of GDP), foreign ownership will grow at about $500b/year
• will be adding 1% annually to foreigners' net ownership of national wealth
• as that ownership grows, so will the annual net investment income flowing out of the country
• will leave US paying ever-increasing dividents and interest to the world rather than being net receiver as in the past
• "We have entered the world of negative compounding - goodbye pleasure, welcome pain."
• Economics 101:
• countries can not for long sustain large, ever-growing trade deficits
• at some point, the spree of the consumption-happy nation would be braked by currency-rate adjustments and by the unwillingness of creditor countries to accept an endless flow of IOUs from the big spenders
• but: US enjoys special status
• can behave today as it wishes because past financial behaviour was exemplary and because it is so rich
• neither its capacity nor its intention to pay is questioned
• continues to have a mountain of desirable assets to trade for consumables
• Buffet: time to halt this trading of assets for consumables and to balance trade
• proposal: Import Certificates
• Import Certificates
• issued to all US exporters in an amount equal to the dollar value of their exports
• exporter can sell the ICs to parties wanting to get goods into the country
  
• exporters abroad
• importers here
• inevitable result: trade balance
• price of certificates determined by supply and demand
• if our exports were to increase and the supply of ICs were therefore to be enlarged, their market price would be driven down
  
• e.g. certificates selling for 1o cent
  
• means 10 cents per dollar of exports behind them
• means producer could realize 10% more by selling his goods in the export markets than by selling them domestically
• extra 10% coming from sale of ICs
• no such thing as a free lunch
  
• foreigners selling to us would face tougher economics
• not nice, but that's a problem they're up against no matter what trade "solution" is adopted
• but: plan does not penalize any specific industry or product
• in the end, free market would determine what would be sold in the US and who would sell it
• ICs only determine aggregate dollar volume of what was sold
• also negative consequences for US citizens
• prices of most imported goods would increase
• so would prices of certain competitive products manufactured domestically
• cost of ICs would act as a tax on consumers
• but: also drawbacks to letting the dollar continually lose its value or to increasing tariffs on specific products or instituting quotas on them
• "The pain of higher prices for goods imported today dims beside the pain we will eventually suffer if we drift along and trade away ever larger portions of our country's net worth"

• A gently declining dollar does not provide the answer
• would reduce our trade deficit to a degree
• but: not by enough to halt the outflow of our country's net worth and the resulting growth in our investment income deficit
• action to halt the rapid outflow of our national wealth is called for
  

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