Buffett warns U.S. trade deficit could cause 'political turmoil'

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By SCOTT SONNER/The Associated Press

Why the U.S. trade deficit scares people

The trade deficit grows when people in foreign nations spend less money to buy goods and services from the United States than people in the United States spend buying from foreign nations.   As the deficit swells, people in foreign nations with a excess of U.S. dollars invest them in dollar-denominated assets, like stocks, U.S. Treasury debt or the U.S. currency itself.   

Some economists fear that if those foreign holders of U.S. assets lose faith, they will dump or reduce their holdings of U.S. assets in a way that could cause investors to panic, markets to crash and an economic depression. 

RENO, Nev. — The U.S. trade deficit is a bigger threat to the domestic economy than either consumer debt or the federal budget deficit, billionaire investor Warren Buffett warned this week.

“Right now, the rest of the world owns $3 trillion more of us than we own of them,” Buffett told business students and faculty Tuesday at the University of Nevada, Reno. “In my view, it will create political turmoil at some point. ... Pretty soon, I think there will be a big adjustment,” he said without elaborating.

Buffett, head of Omaha, Neb.-based Berkshire Hathaway Inc., was in Reno for the opening of the company’s R.C. Willey Home Furnishings store.

The U.S. trade deficit soared to a record $665.9 billion in 2004, and Buffett said he expects it to top $700 billion this year.  

“That’s $2 billion a day. We are like a super rich family that owns a farm the size of Texas. You sell off a little bit of the farm and you don’t see it,” he said.

Fifteen years ago, the U.S. had no trade deficit with China, he said.

“Now it’s $200 billion. If we don’t change the course, the rest of the world could own $15 trillion of us. That’s pretty substantial. That’s equal to the value of all American stock,” Buffett said.

“That’s the big danger. Our national debt does not bother me. Our public debt is not at a crazy level,” he said.

Meanwhile, Buffett said U.S. companies generally are enjoying some of their best times ever.

“Profits are at close to record levels. So business in America is doing very well — better than its lower-paid workers, by some margin,” he said.

“This is a pro-business United States. If you get a group of businessmen together they’ll complain about regulation and liability suits, all kinds of things. Some of those things they are right about and some of it they are just complaining to complain,” he said.

On another subject, Buffett said U.S. corporations seem to be acting more ethically since the scandals at Enron and elsewhere, but that’ primarily due to bad publicity rather than new federal checks and balances.

“I think corporate American to a fair degree has cleaned up its act,” he said. “The press has probably contributed very significantly to that. I think managers are behaving better because of fear rather than just becoming better managers.”

Advising his student audience, Buffett said they will have to decide personally whether a master’s in business administration will benefit their careers more than plunging into the real world.

“The one piece of advice I can give you is, do what turns you on,” he said. “Do something that if you had all the money in the world, you’d still be doing it. You’ve got to have a reason to jump out of bed in the morning.”