BUFFETT DISCUSSES THE USA’S PLUTOCRACY, LESSONS FROM THE CRISIS & DABBLES IN MMT
Warren Buffett is still traveling through Asia and still giving interviews. This one is particularly good. Mr. Buffett sat down with Guy Rolnik of The Marker for some in-depth questions ranging from the USA’s plutocracy, lessons from the crisis, and he even dabbles in some MMT a bit.
On lessons from the crisis:
What would you say are the key lessons you took from the financial crisis?
“They are not new lessons. Never owe any money you can’t pay tomorrow morning. Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle. But all of those were old lessons, unfortunately. Even though I didn’t see it coming, those lessons which are timeless allowed us to in effect profit from it rather than suffer from it. Good businesses, good management, plenty of liquidity, always having a loaded gun; if you play by those principles you will do fine no matter what happens. And you don’t ever know what’s going to happen.”
On capitalism:
Do you see things differently today than you did 10 or 20 years ago – the shortcomings of capitalism?
“No, I think capitalism is terrific. Also 10 or 20 years ago. All systems have failings and can be subject to abuse, but if you look at what has been produced over the past couple hundred years or the last 50 years in Israel, and the last couple hundred years in the United States and the last 30 years in much of the emerging world – capitalism works.
On our growing plutocracy:
Jeffrey Sachs from Harvard was saying that the United States is turning into a plutocracy. And this is a feeling you get throughout the world, that the politicians are not powerful and the power is in the hands of a few strong players in the business sector. Do you feel that way?
“We are still a democracy, but we have moved in my lifetime towards a plutocracy. We do not have a plutocracy, I want to emphasize that, but the distribution of wealth and the influence of wealth have moved in that direction.
“If you look at the 1992 top-400 tax returns in the United States, the average income for those 400 people was $45 million per person. The last available figures show $340 million per person – that is eight for one in a period when the average worker went no place.
“The average tax rate for the top 400 went from 28% down to 16.6% during the same period, so we have had a system where as people have gotten richer and richer, they have been favored by taxation and have gotten richer to a greater degree. To my mind that is a bad trend, and it will probably get corrected in time. The rich have more influence in politics than they did 50 years ago.”
How will it change?
“I think it will change because we still have a democracy. Eventually the power of a correct idea is felt, but sometimes it is long and delayed.”
On the USA’s debt burden (you’ll notice his answer is a bit MMTish…):
Let’s talk about the macro-economy; a lot of people are concerned, with U.S. debt at about $15 trillion – you are still very optimistic about America. How do you reconcile this?
“America and a lot of other countries too are remarkably resilient. I mean, we make all kinds of mistakes in our country and we will continue to make them. But we are a country that has gone through a civil war, a country that has gone through 15 recessions, a great depression a flu epidemic, a cold war.
“There are always problems, but there are always opportunities, the thing that really counts is having 309 million people or so with a great number of them trying to make their lives better and the lives of people around them better.
But today foreigners have a bigger claim on this pie. Compared with the past 10-20 years, foreigners hold more equity, and more stock and more debt of America.
“Foreigners across the world have about a $3 trillion net balance against the United States. There was a time when we had a net balance against the rest of the world. It’s better not to have a $3 trillion balance, but we also have about a $60 trillion economy – we can handle it.
“I don’t like policies that lead to that number increasing and I have written about it, but let’s not get into that. Everything that we have is denominated in our own currency, and that’s a tremendous advantage.” (emphasis added)
On the best ways to beat inflation:
“Well, when I was born in 1930, the dollar bill of that moment is worth six cents, so it isn’t inflation that destroys the country.
“Every time I get worried about inflation I think about how 94% of that dollar bill from when I was born isn’t worth anything, yet I seem to have done pretty well, so it can’t destroy everything.
“Nevertheless, I worry about inflation always because it is such an easy solution to things in the short term. The ultimate defense against inflation is your own talent, your own earning power. I mean, the best doctor in town, the best lawyer in town, the best musician, the best anything, whatever it may be, they will always command their share of resources of their society whether the currency is dollars or shekels or shark-sheet.
Read the full interview here.
Source: The Marker
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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58 Comments
Great stuff. Thanks Cullen. The diversity and quality of your subject matter never ceases to amaze me. How do you cover so much material in a 24 hour period?
I read a lot. It’s not really a great talent.
Buffett spoke of this “MMT-like” thinking way back in 2003 in his “Squanderville vs Thriftville” story, as well as his solution to the problem
http://www.freerepublic.com/focus/f-news/1053684/posts
I prefer to think that one day last fall, Buffett was sitting at his desk and opened a letter from a stranger…
rvm Reply:
October 26th, 2010 at 4:57 pm
I sent him (Buffett) a regular USPS letter about MMT couple of weeks ago.
http://moslereconomics.com/2010/10/26/yen-chart/#comment-29502
Thanks Beowulf. That’s interesting. I had never seen those comments before. Nice to know Buffett gets it.
On a related note – I can confirm that Mr Buffett does indeed read his mail. I wrote him several years ago and received a type (yes, 1950s style typewriter) letter in return….Amazing.
Hmm, I wonder if I could pay a virtual assistant in India to type up my emails with an manual typewriter and send out correspondence by mail. I’ll have to think of a workaround on the postmark.
)
Good story, that’s cool he wrote youback. So I guess he did read rvm’s letter.
To switch gears, isn’t the fraction of household wealth that is real estate ex mortgages? Someone with a $200,000 house with a $100,000 mortgage has a higher net worth than his neighbor with a $200,000 house with a $300,000 mortgage.
Those are great quotes. I feel just a bit more positive about the man’s humanity.
Thanks for finding and posting.
Yeah, good stuff Roger. When you think about Buffett you just have to remember what he really is. He’s a shark. He’s the folksy small town guy on the outside and in the boardroom he’ll step on your throat. Great businessman, but no one should fall for his folksy charm. Did you read my piece on him?
http://pragcap.com/the-many-myths-of-warren-buffett
The many myths of Buffett is one of the best pieces youv’e ever written! I make sure to re-read it every few months, and it gets better every time.
On a side note, I wouldn’t be surprised if Buffett understands much more about MMT than he lets on. Most commentators like to push the “America is going downhill with its enormous debt” propaganda, but not Buffett. In every interview, he’s always bullish on America in the long term. Maybe this is because he understands that the public debt “burden” is not really a burden, and what matters is the productive capacity of the country….
That was worth re-reading. Thanks.
Look, I know that no one is a perfect saint, including myself. I just feel better if someone with access to the media, and who commands respect (even if only by virtue of his wealth) speaks the truth.
In fact, it is remarkable when it occurs, since it resembles a “man bites dog” story, in it’s rarity.
Were the comments self-serving? Perhaps, but on balance, I don’t think so.
Has he behaved as a ruthless businessman? Has he benifited greatly from the system that favors people like him? Yes, to both.
Has he made attempts to distribute his wealth to the less advantaged in a meaningful way? Has he criticized the system that has increasingly favored the wealthiest? Yes, to both.
Good article
Where did he get $60 trillion economy? Can anyone explain. Thanks.
Without asking Warren himself I can only speculate, but with the US economy at about $15T and representing about 25% of world GDP, the $60T is likely world GDP.
GWP (gross world product): $62.27 trillion (2010 est.)
source: https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html
Yes, but isn’t he talking about US economy? So, maybe he’s taking 15T and spreading it over something like 4 years of average duration of claims? I am pulling stuff out of my a$$, of course.
I was puzzled, too. Since he was talking in the context of $3 trillion in US assets owned by foreigners I took it to mean that the stock of assets in the USA are worth $60 trillion (although that seems very high to me).
No one gets it better than Buffet. He cuts through the clutter. In business he may be a shark, but I get the sense that he is a very decent human being. Michael Jordan didn’t reach the top of his profession being a nice guy on the court.
According to this (from the Federal Reserve), U.S. household/non-profit net worth is around $57 trillion:
http://www.federalreserve.gov/releases/z1/Current/z1r-5.pdf
There’s also this quote of his, from the full interview, which makes me think that this is the “$60 trillion economy” he’s referring to:
“The American people, including banks, Congress, the administration, Freddie Mac and Fannie Mae, the media – they all subscribed to the idea that residential housing could not collapse …. The idea that a $22-trillion asset class in an economy that is only worth in aggregate maybe $55-60 trillion, which for two-thirds of people with their own homes was their major asset, and in many cases they borrowed very significant funds against something that would plunge in value – this was something that we all participated in.”
Pretty sure he’s referring to household net worth.
http://research.stlouisfed.org/fred2/series/TNWBSHNO?rid=52
He is definitely talking about the aggregate value of all U.S. assets. His point was that the current malaise makes sense when real estate, being $20+ trillion or 1/3 of the net worth of the U.S., had major issues.
We have a Republic not a “democracy”. The term is often misused to describe our system of government.
Sorry this is just one of those things that bugs me when it is used by people in a position of authority.
We have both a “republic” and a “democracy,” actually. The two terms are not mutually exclusive. “Representative democracy” is simply a subset of “democracy.”
To be more accurate, I suppose you could call the United States a “constitutional federal republic governed by democratically elected representatives,” if that works for you.
The US is as close as it gets to being a plutocracy, without actually being one.
Only way out is campaign reform and a stop to the rotating doors between congress and lobbyist/companies that pay for their campaigns.
Is there any merit to oversimplifying the issue (to the extreme) by looking at the rising U.S. debt burden and concluding that the U.S. is merely acting rationally and issuing proportionally more debt at lower interest rates with the expectation of an eventual rise in rates?
They don’t think that far.
Buffett writes:
“Every time I get worried about inflation I think about how 94% of that dollar bill from when I was born isn’t worth anything, yet I seem to have done pretty well, so it can’t destroy everything.
“Nevertheless, I worry about inflation always because it is such an easy solution to things in the short term. The ultimate defense against inflation is your own talent, your own earning power.”
Buffett’s earnings power and inflation hedge has his ability to understand that investing in Common Stocks provides a wonderful vehicle to keeping the ill effects of inflation at bay. (That and his exceptional ability to pick superior companies and buy them cheaply. No small thing!) He learned this from reading Edgar Lawrence Smith’s treatise entitled: “Common Stocks as Long-Term Investments”.
http://www.amazon.com/Common-Stocks-Long-Term-Investments/dp/0766160734
O’k enough already with the bs.
Warren Buffet has a gentle demeanor and a knack for portraying himself as a benevolent capitalist with great concerns over the top 400 tax payers in American using their influence to purchase lower taxes.
Has anyone read anything concerning Warren Buffet other than this whitewash propganda?
His relationship with Goldman Sachs?
His relationship with the Administration?
His relationship with the Fed?
His relationship with the Treasury?
Wells Fargo benevolence toward the middle class?
Buffett is an exceptionally astute “Hedge Fund” manager who has done a magnificent job of crafting a lovable mid-western folksy persona.
Compared with his fortune and value appreciation, Buffett pays little or no taxes as he legally “defers” his tax bill year-after-year and decade-after-decade by continuing to hold stocks and not selling.
NOTE: It is very easy to be “pro taxes” when you rarely pay them!
Buffett is also a full participant in the derivatives markets, though he manages this (from what I’ve read) pretty much himself. In fact he has lobbied Congress to change the Financial Reform Bill proposals on derivatives to grandfather some holders of derivatives (surprise! himself) on some of the proposed regulations and/or reserve requirements.
You are indeed right that Buffett is no simple “got lucky” mid-west farm boy done good.
On the other hand you have to applaud Buffett on his life’s accomplishments; mMost of which (aside from possibly the GS bailout situation) do not seem to have been from screwing others. Buffett through his partnerships and Berkshire Hathaway stock has made a multitude of common people millionaires!
He is an astute, bold and intelligent investor in the micro sense but when it comes to taking the punishment that creates discipline in a free capitalistic market he is like every other rich man/woman in this country…they run to the deep pocket of government for protection while the common man gets turned upside down until every last penny is shaken out of his pocket.
You cant have a plutocracy with out Government protection.
You are right – 2008 would have “killed him” financially if it were not for direct and indirect government support – GS, Wells Fargo, SPX short puts etc.
For me he stopped being someone I respect, based on his invesment merits, as opposed to say Paul Tudor Jones or Seth Klarman.
InvestorX
Wow. These comments are priceless!
Criticizing the man for lack of knowledge and a lack of morals.
And to think that some here actually believe that MMT “got it” before Buffett had…oh, the hubris.
Dan, don’t paint too broadly with that brush. I am not criticizing buffett. I admire the man and everything he’s done. But let’s not be fooled into thinking he is something he’s not and allow ourselves to be tricked into actions that are sold as buffet-like when in fact they are not even close.
Oh, I agree, and I actually wasn’t pointing at you. As a Buffett disciple, I have always been well aware of his past, his current incentives to advocate for certain policies, and the apparent “hypocrisies” of both. But I can obviously understand why most only know of Buffett what they see on CNBC.
However, I find it sad that so many posters who obviously aspire to his level jump on the chance to rag on him, but it does remind me of an aspect of human nature where people build up, only to tear down.
Still, I was commenting more on the apparent belief of some posters here that Buffett “must be coming around to [understanding] MMT.” (By now, I have learned that you say many things tongue-in-cheek, just as I think Krugman simplified MMT and Galbraith overstated his case in response)
Buffett is, hands down, one of the greatest economic and business minds of all-time, so let’s give him some credit. I mean if you believe that he is smart enough to give that “aww-shucks, country bumpkin” attitude while accumulating of the largest fortunes in the history of mankind, then he is smart enough to have understood the economic logic underpinning MMT long before MMT was MMT, although I would not be surprised if he has never heard of Abba Lerner. I mean, the man has spent every waking hour, literally, as a business “learning machine,” as Munger likes to say…
Yes, it is very hard to grasp my tone in my writing and I often forget that. It’s my fault….I totally agree with you on these points above. Sorry for the miscommunication.
Dan… You wrote:
“…then he is smart enough to have understood the economic logic underpinning MMT long before MMT was MMT, although I would not be surprised if he has never heard of Abba Lerner.”
I believe you are right here. If MMT were such a big deal (new thing) that would make a major impact on investment theory, Buffett would have spoken about it more directly by now.
I am indifferent to MMT as my gut tells me it is likely to be similar to MPT and based on a academically well constructed but false reality and logical foundation. But that is my own opinion for the moment, and I am open to considering that I am wrong about this.
I consider myself a value investor first and last and as such, Buffett is the archetype to be studied. And I have studied hi and others for many years. My so called ‘negative’ comments were meant only to provide some reality to the folksy persona that Buffett has developed and amplified over the years (not unlike all great character of history, their image soon supersedes reality). The man is an investment genius, but still a man and makes mistakes now and again (as do we all).
I fully applaud Buffett’s performance and generosity over the years in providing a vehicle for helping so many become so wealthy. It would be very interesting to see how many people Wall Street firms directly have helped make into millionaires (outside the walls of the firm that is)??
Buffet as contributed to popularized “valuation” as a most important investment criteria. He absolutely avoids any kind of dilution including curencies
He does not need to know all about MMT he fully understand that it does not mater where the fiat money comes from, whether its the Treasury the Fed or from the moon its fiat money and other than looking at the statistical facts we have no control over the quantity being issued and diluted. I do not need to know how the rain is form in the atmosphere but I know I need an umbrella. He works knowing this and as he mention “The ultimate “defense” against inflation is your own talent”, Defense is the word. We do not defend our self against something we like or approve of.
Rationalized the so called benefit of MMT and recognizing its existence or its effects are two very different subject.
First, you wrote:
“Buffet … absolutely avoids any kind of dilution including curencies”
Buffett is able to do this because when he knows that buying a piece of an asset that is valued globally, currency is moot. Why? Because if the base country currency is debased through “inflation” (ie: government money printing) the value of the company will not change in the global economy and an international entity will still be willing to pay on or near its true worth (in their home currency). This international currency valuation (and the corresponding currency exchange systems) will cause the cost of the firm in local currency to change in order to match the value set by the international investors price offer.
So if the US Dollar in 1930 is now worth only 6 cents in today’s dollar due to “inflation” (currency debasement), then it is very likely that omitting any company growth whatsoever, the company should be worth at least 15.67x ($1.00/$0.06) its 1930 valuation. With economic growth it should be worth more!
…and if you held the stock all those years, you would have paid ZERO taxes on this appreciated gain in value!
And if you are as good as Buffett in selecting superior companies (for growth and at fair or discounted purchase values) you might also achieve his results.
However, if you left your money in cash in the bank… The government would have raped you blind through monetary expansion (inflation). This is the lesson Buffet learned from Edgar Lawrence Smith. Equities offer perhaps the best hedge against or means to beat the ravaging effects of bad government’s inflationary powers.
Boston.
I agree we should be investing with confidence in the long term “real growth” of the economy instead of protecting our earnings and wealth against the Treasury and Central Banks devastation and market bubbles. Its a colossal society waste of time, energy and resources. Those who should be producing and innovating spend their time ignoring individual human exchange and worry more about the consequences of what the central planers will have on there holdings in the coming months.
Correction: …worth at least “1567x” ($1.00/$0.06) its 1930 valuation.
Sorry Second Correction here… confusing “%” with “X”…
…worth at least “1567%” or 15.67X ($1.00/$0.06) its 1930 valuation
309 Million now – what MMTers don’t seem to get is that oils BTUs dictate what activity level individuals can achieve.
A country with dynamic individuals is a handicap if it cannot have the modern equilivent of the louisiana slave trade.
The dollar may need 200 dollars a barrel to mop up excess reserves but Americas consumption is dependent on cheaper oil given its built investment.
A revival of American heavy industry is however not out of the question.
We are witnessing the opening stages of a deglobalisation event as more capital is needed for local capital intensive energy investments and not the oil spice which needs a fluid imperial matrix to police..
40 years of MMT has been a monumental waste of time and resources as the investments created during that time was made on a false prospectus of super leveraged growth.
Although I do concede that the damage was done chiefly by fractionally reserving the congressional debt to near infinity – those malcontents could simply not be bailed out using goverment money under a Gold standard.
MMT is in effect a policey of all out war against equiliberium – reading Hew Strachan Great war History Bible “To Arms” he states quite rightly that constraints in fiance was not a impediment on the battlefield but such a epic 40 year battle against the enemy Gold has never been attempted before.
A true MMT world?
Its foundation was to avoid insolvency.
Its result is unaccountability and corruption.
The projected U.S. deficit for fiscal 2011 is $1.645 trillion. This will be funded by new issuance of Treasury securities over and above the amount needed to refinance maturing debt plus interest payments on existing debt. About 60% of outstanding Treasury issuance is in the 2-to-10 year maturity range. If we assign the 60% weight to the $1.645 trillion of new debt, we get $987 billion of new 2-to-10 year maturity Treasury notes issued in fiscal 2011 to finance the deficit. Therefore, the Fed’s buying power of $750 billion per year can monetize over 75% of the new 2-to10 year note issuance needed to fund ongoing U.S. budget deficits for the next two years without expanding the balance sheet.
The Fed is now like a 400-pound man who can eat 5,000 calories per day without gaining weight because his morbidly obese metabolism requires it to function. The discussion of QE, QE2 and QE3 has become irrelevant. What we have is permanent QE until such time as the Fed decides to tighten financial conditions. This is unlikely to happen until mid-2012 at the earliest, perhaps later in view of the housing double-dip and increasing oil prices. In any case, QE will be with us for an “extended period” no matter what the Fed announces.
It would matter if the Fed’s purchases had anything to do with deficit spending. But they don’t.
Cullen,
I understand the operational realities of our monetary system, but at the end of the day, the goal of maintaining artificially low interest rates will not be discarded.
And I don’t think we keep track of such metrics as deficits or debt to gdp, etc… merely because they are some throwbacks to the gold standard days. We keep track of these debt and financing type metrics as measurements of the health of the economy. And in that regard, these metrics do matter. They affect everything. We need to keep these “books” so to speak. And so, we speak in terms of the operational realities of these metrics.
I think you would agree that in an MMT world, deficits do matter eventually. The argument lies in how much debt is too much.
As I see it, the MMT argument, reducto ad absurdum, or in extremis, leads one to arrive at the conclusion that we shouldn’t measure anything, that interest rates don’t matter especially in regards to foreign trade policies. Yeah, I know, we need enough money to avoid depression but not more than the productive economy can handle. But that ignores the goods and services we import or the global wage arbitrage we think is advantageous to us, but in the end, isn’t. It’s a global economy, you know? Doesn’t that complicate things?
The math has to make sense – even in an electronic fiat world. That math is how nations judge each other – how they determine the value of existing trade relationships, resource control/allocation, and each other’s currency usage. And there are real world consequences to that. Bilateral non dollar denominated trade agreements are on the rise for a reason. The Math is looking shaky for the US Dollar, and many other post industrial economies’ currencies.
In my opinion, the goal of QE# is to lengthen the lifespan of the current Ponzi game of debt by keeping rates below inflation. And with fingers crossed that we someday soon, somehow, economically grow again at a rate faster than the Ponzi’s rate of growth that leads to its inherent termination. Finger in the dyke solution, if you ask me.
Cullen , you are a true believer – I am a true believer
Lets hope there will not be a religious war , they are such nasty conflicts.
I often wondered if it was possible to create goverment credit with full deposit banks and settle foregin trade imbalances using some Gold mechanism.
Given the priests of finance corrupt everything they touch it is probably impossible without a second fall of Rome.
“…and shark sheet futures rose sharply today…”
-some befuddled market news anchor
4:08 PM Breaking from WSJ: Minneapolis Fed President Kocherlakota says the Fed Funds rate may need to rise 75 basis points in 2011. He also says that QE has boosted inflation expectations more than expected.
Well well well
“…we didn’t expect people to take this whole QE thing very seriously, and doesn’t everyone know about MMT?”
Cullen
Thanks for sharing your insights once again. Why does Bill Gross, obviously a man who knows how the monetary system works, claim there is “stench of US default”? Article link below:
http://www.businessspectator.com.au/bs.nsf/Article/Bill-Gross-US-debt-PIMCO-bonds-pd20110331-FFVT3?OpenDocument&src=rot
Why would the US have so much debt if it only uses debt as a monetary tool?
I would really appreciate your comments on this.
Yeah, I’d love to hear your thoughts on this as well, TPM. I realize Gross is a big fan of hyperbole, but even this seemed a bit over the top to me. Do we have serious future liability issues (SS, Medicare, Medicaid) that need to be addressed? Absolutely. But if they’re not, will it lead to “default?” I’m not convinced. Runaway inflation could absolutely wreak havoc, but isn’t that the reason why the Fed has control over the overnight rates and the bond market? While they seem to have little power to generate economic growth, I think it’s been proven time and time again that they absolutely have the power to contain inflation by raising rates as high as they need to.
What you are describing as our monetary system sounds like “debt free money” similar to that of Guernsey. Am I getting your interpretation wrong?
Ho does say default on its debt but he also says “not in conventional ways”, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.
Warren Buffet’s long term record is incredible. However, if the Fed hadn’t bailed out the TBTFs (including Wells Fargo, the investment banks, AIG etc.)Berkshire’s banking and insurance investments, and its derivatives book, might have gone down in flames.
“Never let the markets dictate your actions. Always be in a position to play your own game. Never take on more risks than you can handle.” I think Mr. Buffet didn’t take his own advice in the second half of the previous decade, and if it weren’t for Ben Bernanke, Tim Geithner and Hank Paulson, he’d have a lot of egg on his face. Hero capitalism is dead.
I think you misunderstood my request. I wasn’t implying that we are revenue-constrained or that trust funds are required to “fund” social security, etc. I think that Bill Gross is making his statement based on the following analysis:
Assuming nominal GDP growth projections, our future liabilities on SS, Medicare and Medicaid threaten to squeeze out other discretionary spending based on their own growth projections. Just because the U.S. government is not revenue-constrained does not mean that it can print money whenever it wants or needs to — it still needs to operate within the constraints of limiting inflation to a reasonable amount. And right now that future spending seems to be in an unhealthy proportion:
http://www.ncpa.org/images/1855.jpg
So perhaps Mr. Gross is simply stating that our current future liabilities will not be able to be met without seriously diluting the value of the dollar — and that this massive inflation will lead to an effective “default” of our currency.
Guess I probably answered my own question there…