March 10th, 2014
1. Is Warren Buffett’s decision to bet against the dollar a good one? Why or why not?
Yes Warren Buffett’s decision to be against thedollar is a good one. Buffett is betting that American trade deficit will not be restored and the country’s practice of borrowing from abroad to pay for the current goods and services will not stop. The USA borrows from abroad to finance its trade deficit, on top of that the USA government spends more money than it takes from taxes. The budget deficit increases the gap between country’s national savings and national income and and also widens the deficit in the current account by necessitating the country to borrow more money from other foreign countries. This widened current deficit
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The widening of the current account deficit is both economic and political hurdle. A huge current account deficit will lead to depreciation of the dollar and the depreciation of the dollar causes inflation because the inexpensive dollar makes imported goods and services very expensive and this higher cost will be passed on the consumers. If the U.S wants to attract foreign investment to fund some of its current account deficit by increasing the interet paid on the investment, this will raise consumer lending rate which will in turn slow down the economy due to cost of money for expansion and capital investment. Depending on the seriousness these circumstances could lead to a recession. The current account deficit is a political problem too. If people cannot afford to put food on the table it becomes a political problem. Every time there is an election all people talk about it the “economy” so this goes to tell that an economic problem is a political problem. The U.S. is headed towards crisis because of the current account deficit. May be one of the problems caused by the current account deficit will necissitate changes in the foreign exchange value of the dollar and this can potentially cause financial crisis. As the foreign exchange value of the dollar decreases in value, the value of the foreign liabilities in terms of domestic purchasing power