Outside, the sky was bleak and the snow was drifting. But inside the meeting hall in Toronto's financial district, the mood was warm, as it usually is when Warren Buffett is in the house – even on those occasions when he's spreading a message of fear.

It was February, 2008. The U.S. economy had slipped into a funk and the markets were rattled, but the world's second-wealthiest man said little to indicate he had a clue about the panic and the chaos that would arrive in months ahead. He didn't see it coming.

But what he did predict that day was major stress on the U.S. dollar. As long as American shoppers and businesses buy far more from abroad than they sell, said the Oracle, there's really only one direction for the greenback to go. “Force-feeding a couple of billion a day to the rest of the world is inconsistent with a stable dollar.”

Here we are, nearly two years later, having gone to financial hell and back – and we're right where Mr. Buffett said we'd be. The buck is sinking, and fast: 6 per cent against the euro so far this year, 14 per cent against the Canadian dollar, 26 per cent against the Brazilian real.

In America, many people think a weak dollar is a good thing because it helps exporters and ought to result in a lower U.S. trade deficit. It's the less-Wal-Mart, more-Boeing strategy for returning the country to prosperity and economic health. And even China hinted this week that it might play along (at least a bit) by letting the yuan rise (at least a bit).

No doubt that would please American congressmen in hard-hit manufacturing states, who have long complained that the Chinese policy of suppressing its currency has come at great cost to blue-collar workers in their districts. But have they thought about the other half of the equation? Because there's a second part to Mr. Buffett's long-held views of U.S. currency and trade policy.

He isn't one of those Chinaphobes who dislikes the U.S. trade deficit for its own sake. Rather, it's the consequences of that deficit: Americans are trading their wealth in return for someone else's goods. In the first nine months of 2009, the United States spent $275-billion (U.S.) more on imported products than they received from exports. Repeat that year after year, decade after decade, and eventually somebody winds up with a whole pile of claims against you. That somebody is China, with its Everest-sized pile of dollar bills and other foreign currencies totalling more than $2-trillion.
China, helpfully, has sent those many of those dollars back to help the U.S. government keep the lights on. But buying the low-yielding T-bills of a high-deficit country with a depreciating currency does not make a wonderful investment. Sooner or later, China and other foreign holders of U.S. dollars will demand something with a little more upside, no?

That may come in the form of higher interest rates that squelch growth. Or it may come through trading some of their U.S. dollars for ownership of some prime American companies. China has tried this before: A state oil company tried to take over Unocal in 2005, then abandoned it because of a wall of political opposition.

But the U.S. has less moral authority with which to block such a move now, especially if China starts to play nice(r) with its currency. And heaven knows that, after the crash, there are a lot of investors who'd happily take the takeover premium and run. The list of big-name U.S. companies whose shareholders have earned nothing over the past 10 years is a long one.
As Mr. Buffett put it that day two winters ago: “The truth is we're selling America to the rest of the world. It's just a question of [in] what form we sell it to them.” It's also a question of when. As the dollar sinks, the era of the foreign acquirer seems to get closer.

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