Why Foreigners Can't Ditch Their (US) Dollars

It is no secret that I greatly admire and respect Warren Buffett as an investor. I would like to share the following write up from Buffett in Fortune Magazine, on why it is not almost impossible for Foreigners to get rid of U.S. Dollars. So, next time you encounter some sort of media scare about foreigners stepping away from the de facto standard of the U.S. dollar, you can quote the following from Buffett:

HOW OFTEN HAVE YOU SEEN A COMMENT LIKE THIS IN ARTICLES ABOUT the
U.S. dollar? “Analysts say that what really worries them is that
foreigners will start moving out of the dollar.”

Next time you see something like that, dismiss it. The fact is
that foreigners— as a whole—cannot ditch their dollars. Indeed,
because our trade deficit is constantly putting new dollars into
the hands of foreigners, they have to just as constantly increase
their U.S. investments.

It’s true, of course, that the rest of the world can choose which
U.S. assets to hold. They can decide, for example, to sell
U.S. bonds to buy U.S. stocks. Or they can make a move into real
estate, as the Japanese did in the 1980s. Moreover, any of those
moves, particularly if they are carried out by anxious sellers or
buyers, can influence the price of the dollar.

But imagine that the Japanese both want to get out of their
U.S. real estate and entirely away from dollar assets. They can’t
accomplish that by selling their real estate to Americans,
because they will get paid in dollars. And if they sell their
real estate to non-Americans—say, the French, for euros—the
property will remain in the hands of foreigners. With either kind
of sale, the dollar assets held by the rest of the world will
not (except for any concurrent shift in the price of the dollar)
have changed.

The bottom line is that other nations simply can’t disinvest in
the U.S. unless they, as a universe, buy more goods and services
from us than we buy from them. That state of affairs would be
called an American trade surplus, and we don’t have one.

You can dream up some radical plots for changing the
situation. For example, the rest of the world could send the
U.S. massive foreign aid that would serve to offset our trade
deficit. But under any realistic view of things, our huge trade
deficit guarantees that the rest of the world must not only hold
the American assets it owns but consistently add to them. And
that’s why, of course, our national net worth is gradually
shifting away from our shores.

Complete Article: http://www.berkshirehathaway.com/letters/growing.pdf