Friday, March 11, 2005
Critique of Warren Buffet's Dollar Analysis
What the author is saying is that if the government prints too many dollars relative to economic activity, the dollar will be devalued.
Buffett was right about the dollar but he was right for the wrong reasons. As we’ve shown in the above chart on trade deficits and dollar valuation, the two simply do not relate. The dollar is falling because dollars are worth less than they were before. Dollars are worth less than they were before because our central bank is printing too many of them. Supply-side economics explains the dollar decline perfectly.
In some ways Warren Buffet’s pronouncements on economics are similar to his pronouncements on abortion and other areas of social policy. They are just the opinion of one man. But Warren Buffett is not a highly-successful investor because of his knowledge of economics. As Burton Malkiel, the author of the classic book A Random Walk Down Wall Street, once said, Buffett is an extremely talented business manager. He doesn’t spot the big economic trends; instead he spots the best companies, buys majority shares, takes control, and streamlines them.
What the author is saying is that if the government prints too many dollars relative to economic activity, the dollar will be devalued.
