1998: Will Japan sell its U.S. Treasuries?

AUDIENCE MEMBER: Hi, my name is Mary Semler (PH) from Seattle, Washington.

Japan is a major holder of U.S. Treasurys. Given the troubled Japanese economy, do you foresee Japan cashing in their U.S. investments to bail themselves out? Why or why not?

WARREN BUFFETT: Probably didn’t get all that. I was busy chewing.

CHARLIE MUNGER: I didn’t get that, either.

WARREN BUFFETT: I was busy chewing here and —

AUDIENCE MEMBER: Japan is a major holder of U.S. Treasurys. Given the troubled Japanese economy, do you foresee Japan cashing in their U.S. investments to bail themselves out? Why or why not?

WARREN BUFFETT: The problems with the Japanese economy and does that mean that — are you thinking particularly about them dumping Treasurys or something of the sort?

CHARLIE MUNGER: That’s exactly what she’s —

WARREN BUFFETT: Yeah. (Laughter)

Well, you know, it’s very interesting. All the questions about what so-called foreigners do with investments.

Let’s just assume the Japanese, or any other country, decides to sell some U.S. government holdings that they have. If they sell them to U.S. corporations or citizens or anything, what do they receive in exchange? They receive U.S. dollars. What do they do with the U.S. dollars? You know, I mean they can’t get out of the system.

If they sell them to the French, you know, the French give them something in return. Now the French own the government securities.

But really as long as we, the United States, run a deficit — a big deficit — a trade deficit — we are accepting goods and giving something in exchange to foreigners. I mean when they send us whatever it may be — and on balance they send us more of that then we send over there — we give them something in exchange.

We give them — we may give them an IOU. We may give them a government bond. But we may give them an investment they make in the United States.

But they have to be net investors in this country as long as we’re net consumers of their goods. It’s a tautology.

So I don’t even know quite how a foreign government dumps its government bonds without getting some other type of asset in exchange that may have an effect on a different market.

The one question you always want to ask in economics is — and not a bad idea elsewhere, too — but is, “And then what?” Because there’s always a second side to a transaction.

And just ask yourself, if you are a Japanese bank and you sell a billion dollars’ worth of government bonds — U.S. government bonds — what do you receive in exchange, and what do you do with it? And if you follow that through, I don’t think you’ll be worried about foreign governments selling U.S. bonds. It is not a threat.

Charlie?

CHARLIE MUNGER: If I owned Japan, I would want a large holding of U.S. Treasurys. You’re on an island nation without much in the way of natural resources. I think their policy is quite intelligent for Japan, and I’d be very surprised if they dumped all their Treasurys.

WARREN BUFFETT: If they’re a net exporter to us, though, what choice do they have? When you think about it.

If they send over more goods to us than we send to them — which has been the case — they have to get something in exchange. Now for a while they were taking movie studios in exchange, you know — (Laughter)

They were taking New York real estate in exchange.

I mean they’ve got a choice of assets, but they don’t have a choice as to whether — if they send us more than they get from us — whether they get some investment asset in return.

I mean it’s amazing to me how little discussion there is about the fact that there’s two sides to an equation. But it makes for better headlines, I guess, when read the other way.