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Warren Buffet’s 2003 Prophecy: Spenders vs Thrifts

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Archian - Life, Bacolod, Architecture, Finances & Dubai

Warren Buffet’s Prophecy (Global Recession of 2008) Spenders vs Thrifts

After creating my Dark Stained White Exhibit in SM, I have 4 Artworks that related to finances or showed the power of money or greed in our life. The four are: The Fall of Mammon I, The Fall of Mammon II, China on the Gates II and the Economic Rumble.

This financial or monetary position affects a lot of us. It can be applied to individuals, or like the Economic Rumble, be applied to Nations. I am reminded of the United States‘ and Europe’s (Actually Greece, Spain and Ireland) Financial position during the 2008 Global Financial Crisis.

Before the World fell into Economic Crisis, the Oracle from Omaha – Warren Buffet of Berkshire Hathaway gave an interesting article that you may want to read.

The following is an excerpt from Warren E. Buffet’s Article published on the 2003 Issue of Fortune Magazine. I have modified some of the parallelisms for clearer understanding to Filipino Readers. -Archian

Spenders vs Thrifts

Spenders vs Thrifts

Spender City vs Thrift City

“America’s growing trade deficit is selling the nation out from under them. Here’s a way to fix the problem—and we need to do it now. I’m about to deliver a warning regarding the U.S. trade deficit. I started way back in 1987 to publicly worry about our mounting trade deficits—and, as you know, we’ve not only survived but also thrived. So on the trade front, score at least one “wolf” for me. Nevertheless, I (Warren Buffet) am crying wolf again and this time backing it with Berkshire Hathaway‘s money. 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. I won’t give you particulars; in fact, 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.”

Originally written in Warren Buffet: Spenders vs Thrifts

Warren Buffett discusses Trade policies

Warren Buffet discusses Trade policies

“Both as an American and as an investor, I (Warren Buffet) 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.”

“But as head of Berkshire Hathaway, I am in charge of investing its money in ways that make sense. And my reason for finally putting my money where my mouth has been so long is that our trade deficit has greatly worsened, to the point that the US’s “net worth,” so to speak, is now being transferred abroad at an alarming rate.”

The Story of Maaksaya City and Maimpok City
“A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Spender City (City of Maaksaya) and Thrift City (City of Maimpok). Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that’s how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.”

“Eventually, though, the industrious citizens of Thrift City (City of Maimpok) decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Spender City (City of Maaksaya).”

“The citizens of Spender City (City of Maaksaya) are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there’s a quid pro quo—but to the Spenders, it seems harmless: All that the Thifts (Savers) want in exchange for their food is Spender Bonds (which are denominated, naturally, in Spender Pesos).”

“Over time Thrift City (City of Maimpok) accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Spender City (City of Maaksaya). A few pundits in Spender City (City of Maaksaya) smell trouble coming. They foresee that for the Spenders both to eat and to pay off—or simply service—the debt they’re piling up will eventually require them to work more than eight hours a day. But the residents of Spender City (City of Maaksaya) are in no mood to listen to such doomsaying.”

“Meanwhile, the citizens of Thrift City (City of Maimpok) begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thifts (Savers) change strategy: Though they continue to hold some bonds, they sell most of them to Spender City (City of Maaksaya) residents for Spenderbucks and use the proceeds to buy Spender City (City of Maaksaya) land. And eventually the Thifts (Savers) own all of Spender City (City of Maaksaya).”

“At that point, the Spenders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat—they have nothing left to trade—but must also work additional hours to service their debt and pay Thrift City (City of Maimpok) rent on the land so imprudently sold. In effect, Spender City (City of Maaksaya) has been colonized by purchase rather than conquest.”

“It can be argued, of course, that the present value of the future production that Spender City (City of Maaksaya) must forever ship to Thrift City (City of Maimpok) only equates to the production Thrift City (City of Maimpok) initially gave up and that therefore both have received a fair deal. But since one generation of Spenders gets the free ride and future generations pay in perpetuity for it, there are—in economist talk—some pretty dramatic “inter-generational inequities.”

Warren Buffet Prophecy of the coming Economic Crisis

Warren Buffet Prophecy of the coming Economic Crisis

“Let’s think of it in terms of a family: Imagine that Juan de la Cruz, can get the suppliers of all that I consume in my lifetime to take the de la Cruz family IOUs that are payable, in goods and services and with interest added, by my descendants. This scenario may be viewed as effecting an even trade between the Buffet family unit and its creditors. But the generations of de la Cruz following me are not likely to applaud the deal (and, heaven forbid, may even attempt to welsh on it).”

“Think again about those islands: Sooner or later the Spender City (City of Maaksaya) government, facing ever greater payments to service debt, would decide to embrace highly inflationary policies—that is, issue more Spender-bucks to dilute the value of each. After all, the government would reason, those irritating Spender-bonds are simply claims on specific numbers of Spender-bucks, not on bucks of specific value. In short, making Spender-bucks less valuable would ease the island’s fiscal pain.”

“That prospect is why I, were I a resident of Thrift City (City of Maimpok), would opt for direct ownership of Spender City (City of Maaksaya) land rather than bonds of the island’s government. 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.”

American Businesses represented by Wall Street

American Businesses represented by Wall Street

The US Situation
“So what does all this island hopping have to do with the U.S.? Simply put, after World War II and up until the early 1970s we operated in the industrious Thrift City (City of Maimpok) style, regularly selling more abroad than we purchased. We concurrently invested our surplus abroad, with the result that our net investment—that is, our holdings of foreign assets less foreign holdings of U.S. assets—increased (under methodology, since revised, that the government was then using) from $37 billion in 1950 to $68 billion in 1970. In those days, to sum up, the US’s “net worth,” viewed in totality, consisted of all the wealth within our borders plus a modest portion of the wealth in the rest of the world.”

“Additionally, because the U.S. was in a net ownership position with respect to the rest of the world, we realized net investment income that, piled on top of our trade surplus, became a second source of investable funds. Our fiscal situation was thus similar to that of an individual who was both saving some of his salary and reinvesting the dividends from his existing nest egg.”

“In the late 1970s the trade situation reversed, producing deficits that initially ran about 1% of GDP. That was hardly serious, particularly because net investment income remained positive. Indeed, with the power of compound interest working for us, our net ownership balance hit its high in 1980 at $360 billion.”

Global Financial Crisis

Global Financial Crisis

“Since then, however, it’s been all downhill, with the pace of decline rapidly accelerating in the past five years. Our annual trade deficit now exceeds 4% of GDP. Equally ominous, the rest of the world owns a staggering $2.5 trillion more of the U.S. than we own of other countries. Some of this $2.5 trillion is invested in claim checks—U.S. bonds, both governmental and private—and some in such assets as property and equity securities.”

Global Fiancial Crisis brings Recession

Global Fiancial Crisis brings Recession

The US Economic Dilemma
“In effect, the US has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than we produce—that’s the trade deficit—we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own. “

“To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth. Those comparisons show that what’s already been transferred abroad is meaningful— in the area, for example, of 5% of our national wealth.”

Philippines Financial Position

Philippines Financial Position

The Philippines’ Situation
Just like our American colonizer, we were one of the earliest industrialized countries in Asia. Because we are industrialized, we produced lots of surplus goods and services while the rest including Hongkong and South Korea were developing nations catching up with technology.

Then during the 70’s, we had some critical unrests and disruptions on the economy. And similarly, we were enjoying the benefits of momentum of past progressive wealth. As time passed by, our imports catches up with our exports and the rest is Philippine History.

I pray that we, as a people, not only work hard, but restore integrity in our work and produce more than we consume and I believe someday, we will be where we were meant to be as a people.

Author: Archian

An Architect, Blogger and Strategic Thinker

One thought on “Warren Buffet’s 2003 Prophecy: Spenders vs Thrifts

  1. Pingback: Top Philippine Entrepreneurs List for 2012 « Archian Speaks

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