Wednesday, May 10, 2006

A lesson for Warren Buffett on international investment

Berkshire Hathaway recently announced that it's buying an 80% stake in Iscar Metalworking. An Israeli newspaper quoted him as saying, "I plan further acquisitions of Israeli companies in the future." Buffett also said, "There are dozens of countries in which we would be happy to buy the right business."

Side note: see what happens when a country strives for a free market and democratic principles? It will attract investment capital from all over the world, leading to prosperity and encouraging even more freedom. Are you listening, Hugo Chavez and Evo Morales, you tyrants who are leading your countries down the path of economic destruction? Manuel Obrador won't listen, and he might just win Mexico's presidential election. Obrador opposes foreign investment, though Pemex (Mexico's nationalized oil company) cannot survive with foreign capital. Apparently Obrador would prefer that Mexico stay poor if achieving prosperity means those evil foreign capitalists also profit.

This international transaction ought to show Buffett the error of his ways, but it's likely he will still believe that the U.S. should force zero trade deficits, restricting imports so they don't exceed exports. However, trade gaps are, by definition, balanced by foreigners' investments in the country running the trade deficit. Foreigners have to do something with the money they earn from selling goods and services, so they buy assets in that country. But it doesn't even matter that it's the same foreigners buying assets, which might surprise people that have the false idea that trade deficits are inherently bad.

Israel is running a trade deficit, which is actually typical of growing economies today, and Buffett is helping to balance it by acquiring Israeli assets. It wouldn't matter if Buffett were involved in 0% or 100% of all exports to Israel. Buffett would eventually do business with someone who would eventually do business with someone who export goods and services to Israel. The money might get converted from shekels to euros to pounds sterling to dollars, and then Buffett would convert them back to shekels. It all balances out in the end.

Another example: I spend money at my local supermarket, which buys nothing from me. I'm not going to worry about that, or that none of the employees together do an equivalent amount of business directly with me. Their own spending will spread throughout the economy (the global economy if need be), and everything will balance out in the end. One might invest $100 that week via my employer's brokerage arm, but only a very, very small fraction of the fees will help pay my salary. Or he'll invest $100 through another firm, with similar fractions spreading throughout. So how do I eventually get back the money I spent on groceries? The flows are too complex to spend time on, really, and it doesn't matter anyway: money is the ultimate fungible commodity. Some people track the travel of dollar bills as a curiosity, but it's obvious that one bill is as green as the other. A penny here, a penny there, and it eventually adds up. So just like I don't worry about the precise source of each paycheck, I don't worry about the precise source of foreign investment to balance out a trade deficit. Actually, I don't worry about trade deficits at all.

A trade deficit is neither good or bad, only an indication that domestic consumers would rather spend their money while foreigners supply capital. There's no danger of foreigners buying up an entire country, Don Boudreaux just explained, because as an economy grows, new assets are created that foreigners can buy. Foreigners' particular preferences even directs the creation of new assets just like domestic consumers' desires would. One example I have emphasized is real estate, especially in New York City. Some foreigners contract to buy luxury apartments even before construction has begun on the high-rises, because they need to do something, after all, with the money they earn from selling their goods and services to Americans. The dollars eventually come home.

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1 Comments:

Anonymous Anonymous said...

A LESSON ON INVESTING IN AN INTERNATIONAL MELON BUFFET: ALL I EVER READ ON THIS SITE IS ABOUT HOW THE FRENCH ARE WEAK. THIS IS TRUE. BUT CONSIDER THE JUGGS MY FRIEND, CONSIDER THE JUGGS...I SAY ENJOY ALL TYPES OF BAZOOKAS AND DO NOT OMIT ANY NATIONALITY FOR VARIETY IS THE SPICE OF LIFE.

LORD BONER HAS SPOKEN....

Wednesday, May 10, 2006 10:31:00 AM  

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