1. Is Warren Buffett’s decision to bet against the dollar a good one? Why or why not? A: Yes. He is betting that trade deficit will not be fixed and American’s bad habit of borrowing from abroad to pay for today will not stop. This is caused by Americans spending far more on imports than they are earning from exports. To finance this trade deficit, the U.S. borrows from abroad. Also, the U.S. government is spending more than it takes in from taxes. The budget deficits widens the gap between the national income and national savings and increases the deficit in the current account by requiring more borrowing from abroad. The widening current deficit puts pressure on U.S. currency in the financial markets. As long as Americans are willing to buy cheap imported goods and the U.S. government has a budget deficit, Warren Buffett is making an excellent move by betting against dollar. Already, the dollar has fallen 40% between 2002 and 2007 as the U.S. debt grew 60% (Amadeo).
2. Why has the United States developed such large current account deficit?
A: One main reason why United States has developed such large current account deficit is the trade deficit. The trade deficit describes a state of balance of trade which negative where U.S. importing goods and services more than it exports. The U.S. has held a trade deficit starting late in the 1960s. Its trade deficit has been increasing at a large rate since 1997 and set a record high of 817.3 billion dollars in 2008, up from 767.5 billion dollars the previous year (U.S. Census Bureau, 2011). Last few years, surging oil prices helped widen the current account deficit. For May, the Commerce Department stated that the trade deficit increase 15.1 percent to $50.2 billion, mainly due to big increase in oil imports, and this is the largest imbalance since October 2008 (Crutsinger, 2011).
Another component of the large US current account deficit is the budget deficit. Year after year, the...