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Warren Buffett describes why he had become so bearish on the dollar that in 2002, for the first time ever, he invested in foreign currencies.

To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville. Land is the only capital asset on these islands, and their communities are primitive, needing only food and producing only food. Working eight hours a day, in fact, each inhabitant can produce enough food to sustain himself or herself. And for a long time that’s how things go along. On each island everybody works the prescribed eight hours a day, which means that each society is self-sufficient.

Eventually, though, the industrious citizens of Thriftville decide to do some serious saving and investing, and they start to work 16 hours a day. In this mode they continue to live off the food they produce in eight hours of work but begin exporting an equal amount to their one and only trading outlet, Squanderville.

The citizens of Squanderville are ecstatic about this turn of events, since they can now live their lives free from toil but eat as well as ever. Oh, yes, there’s a quid pro quo — but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Over time Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. A few pundits in Squanderville smell trouble coming. They foresee that for the Squanders both to eat and to pay off — or simply service — the debt they’re piling up will eventually require them to work more than eight hours a day. But the residents of Squanderville are in no mood to listen to such doomsaying.

Meanwhile, the citizens of Thriftville begin to get nervous. Just how good, they ask, are the IOUs of a shiftless island? So the Thrifts change strategy: Though they continue to hold some bonds, they sell most of them to Squanderville residents for Squanderbucks and use the proceeds to buy Squanderville land. And eventually the Thrifts own all of Squanderville.

At that point, the Squanders are forced to deal with an ugly equation: They must now not only return to working eight hours a day in order to eat — they have nothing left to trade — but must also work additional hours to service their debt and pay Thriftville rent on the land so imprudently sold. In effect, Squanderville has been colonized by purchase rather than conquest.

Weak Dollar Fuels China’s Buying Spree Of U.S. Firms.

In 2007, acquisitions in the United States by foreign ventures hit $407 billion, up 93 percent from the previous year, according to Thomson Financial. The top countries investing were Canada, Britain and Germany; the Middle East and Asia — especially China — are quickly catching up.

The biggest deals in recent months have involved Wall Street firms hit by losses from exposure to mortgage-related investment vehicles. […]

“The U.S. dollar is getting weaker and weaker, and many medium to small U.S. companies are in economic crisis. So they need investments from China. It is very good timing,” said Yu Dan, a representative for the state of Pennsylvania in China.

Yu, who is one of about 30 people in China who represent American cities and states, said at least six Chinese companies are in the process of closing deals in Pennsylvania. One will make some purchases in the food industry. Another will invest in the wood industry, because as Yu put it, “Pennsylvania has very good hardwood resources, and the aboriginal people in the north Pennsylvania woods are good workers.”

Aboriginal people? The Amish, Yu clarified.