Buffett's Latest NYT Op-Ed: The Greenback Effect

The last one urged people to "buy American" stocks. This one is a warning about the side effects to be expected from the extraordinary fiscal and monetary measures that have been taken to turn around the economy.

A little background: Buffett's father Howard was kind of a psychopath about inflation--he thought FDR would turn the US into the Weimar Republic. His son was never as bad, but throughout his career the specter of inflation has always guided his investment decisions. In 1977 he wrote an essay for Fortune called "How Inflation Swindles the Equity Investor" which is the best analysis of the effect of inflation on corporations I've ever read.

Buffett almost guarantees that one day the United States will face higher inflation as a result of the actions being taken. Yet here we sit with the 10-Year Treasury yielding 3.53%.

P.S. Some might argue that this op-ed conflicts with the last op-ed he wrote, in which he urged Americans to buy equities. If we're in for inflation, stocks will do poorly, like they did in the 1970s.

But read the first op-ed closely and you'll see that Buffett recommended only that Americans buy equities as an alternative to cash, which is perfectly consistent with his thinking in the second op-ed.

In fact, if you fear inflation your money may be best off in equities (public or private, in the sense of being a business owner), even more so than gold.

Comments

[Tony Petroski:]

Buffett is still caught in the grip of global warming hysteria. How far-sighted can he be? Hasn't someone told him it's now "Climate Change" so we can tax and regulate people whether the trend in temperatures goes up or down.

Cap and tax will do as much damage to the US economy as the inflation he worries about. Indeed, one way to keep a lid on inflation is to make sure the economy never recovers.

Buffett thought he was undertaxed. He's going to get his wish.

Aug 19 10:36 AM

[market ace:]

I think the inflationist are missing a very important point They mistake those green pieces of paper that Bernanke keeps printing and dumping on the banks so they can buy US Treasuries as money and this "excess" money will cause inflation.

The reality is that these pieces of paper have not been "money" in the US for a long time, because in reality "credit " is our money. Evrything is bought with credit by gov't and the people. Our "money" is the plastic in our wallets, mortgages, home equity loans, car loans etc.

While FR$ are being printed the credit contraction of our real money is sharp and will continue and this can only bring deflation. Shorgages and lack of supply may cause future prices increases and a currency devaluation, voluntary or otherwise, may appear to cause inflation (price increases) but inflation as we know it is almost impossible as credit disappears. The Bond markets know this in spite of the media constantly ringing the inflation bell.

Until a new type of stable monetary system is found for the US and indeed the world it appears that inflation is not the biggest worry around.

Aug 19 10:55 AM

[Zachary Sch...:]

Market ace, I think the contraction in credit is certainly helping to hold prices lower for the time being, but this contraction is very small compared to the long-term effect of the new dollars in the system. The loose monetary policy has not been effective yet because the velocity of money has been so low. But once the economy begins to turn (I say Economy - not Market) the velocity will pick up and inflation will quickly become a serious issue.

At that point, the Fed will have the dubious choice of either raising rates to fend off inflation (which would kill the expansion) or keeping rates low to continue to encourage the recovery (which leaves us with inflation). I'm pretty sure I know which direction will be chosen.

zachstocks.com

Aug 19 11:16 AM

[Bill L.:]

In the short to medium term, say over the next few months I think the dollar might actually rally; it's hitting some very long term support, it has been extremely oversold, and sentiment against the dollar is extremely poor to the point that contrarians should take note.

In the long term, say over the next few years inflation is almost a certainty as the economy stabilizes. The Fed has a poor historical record in terms of its timing of interest rate tightening. The fact that this decision is now becoming so public and politicized will only make the Fed's decision making worse. Overall I thought Buffet's Oped was consistent; the last thing you want to do is own federal reserve notes, and it would be wiser to have ownership in tangible businesses.

Aug 19 11:26 AM

[Alex_G:]

Zach,

M3, or bank credit, is still falling off a cliff. Wealth losses are well over $10 trillion. Banks are holding the cash for future commercial loan losses, and are only deploying capital for trading.

The "money being printed" so far is 1/5th of money, or wealth, lost. The world is just now realizing that non-stimulus growth hinges on the American consumer coming back to the trough. Good luck with that.

Inflation will not happen until the bank reserves are leveraged to provide consumer loans, and consumers begin to compete for goods with their "excess dollars".

Aug 19 11:33 AM

[John Lounsbury:]

Market Ace - - -

You wrote:

"I think the inflationist are missing a very important point They mistake those green pieces of paper that Bernanke keeps printing and dumping on the banks so they can buy US Treasuries as money and this "excess" money will cause inflation."

I feel you have argued well, but missed one point. There is inflation and the bubble is now in Treasuries. My view is that when this bubble breaks the next inflation bubble will be in commodities (basically the dollar and other currencies undergoing devaluation). While inflation in Treasuries can occur without flowing through to what people buy (in fact Treasuries can bubble when there is deflation elsewhere). With the commodity bubble, rising costs will flow through to consumer prices and broader inflation will occur.

Aug 19 11:40 AM

[sabre_jenn:]

"... Yet here we sit with the 10-Year Treasury yielding 3.53%. ..."

This is equivalent to saying that all the dot-com businesses must be great investments because their stock prices were so high in 1999

Treasury yields reflect a combination of Bernanke's manipulation and a fear that many listed companies are knowingly and deliberately misreporting their books... Treasury yields do not prove (or disprove) anything about inflation

Aug 19 11:43 AM

[The Geoffster:]

In fact, treasury yields seem to be discounting inflation, but are probably more a function of risk aversion. My money (TBT) is on John Lounsbury's analysis because the rate of borrowing is unsustainable and rates will have to rise to fund the debt.


On Aug 19 11:43 AM sabre_jenn wrote:

> "... Yet here we sit with the 10-Year Treasury yielding 3.53%. ..."
>
>
> This is equivalent to saying that all the dot-com businesses must
> be great investments because their stock prices were so high in 1999
>
>
> Treasury yields reflect a combination of Bernanke's manipulation
> and a fear that many listed companies are knowingly and deliberately
> misreporting their books... Treasury yields do not prove (or
> disprove) anything about inflation

Aug 19 12:33 PM

[Zmartmoney:]

I think that "inflation" has lost some of its relevance for the average person. We normally understand inflation in terms of money velocity - the faster money moves, the more prices will rise. If velocity is very low, as it is now, prices won't rise except in the terms of every other country's currency valuation. We've had it both ways for so long we don't understand what really happens when everyone else tells us our money isn't worth much anymore. Once the international value of our money begins to drop, and prices of foreign made goods begin to rise, not because of the velocity of money, but because of the value of the dollar, then all bets are off. The term "stagflation" comes to mind as a good descriptor. Combine that with a jobless recovery and you get soup lines for a very disturbing part of the (former) workforce. This massive taxation is all the more reason that this spend-o-matic congress needs to be turned out to pasture. We need some public hangings of miscreants that brought us these AAA ratings of trash investments, and the CEOs that fed the frenzy, knowing how it would end for the American people. I fear that the next stage of market instability will start a rush for the exits, only to find that they've been nailed shut.

Aug 19 12:34 PM

[gato:]

Take a look at the stock market is it not..."inflating"...?
gato

Aug 19 12:37 PM

[six:]

Blah Blah Blah... Tell Warren to cram it. Sure he tells America to buy equities- HE IS TALKING HIS BOOK! WB is probably the greatest stock picker of all time, in the past he has always refrained from offering opinon on the economy. He should go back to that line of thought. THERE WILL BE NO INFLATION UNTIL THE VELOCITY OF MONEY INCREASES DRAMTICALLY... That is a long, long, long way off in the future. America is in a deflationary sprial. Are you paying more or less for a car, a house, milk or gasoline as compared to last year? Are you making more or less that last year? (That is assuming you are still working).
LESS PEOPLE ARE WORKING, THOSE THAT ARE WORKING ARE MAKING LESS MONEY AND THE MONEY THEY ARE EARNING THEY ARE USING TO PAY OFF DEBT OR FOR SAVINGS. How does this add up to inflation of prices? Warren know this but does not want to admit to you and me.
DEFLATIONARY DEBT DESTRUCTION!
"those city jobs are gonna fast and they ain't comming back"

Aug 19 01:00 PM

[Zmartmoney:]

Gato - good point, and one I watch with some curiousity. It seems that the market is already folding in anticipated inflation in its current pricing. The problem is another bubble based on the expectation of velocity increasing, which it won't for quite some time. Once that becomes apparent, then the value of equities will tumble again. I expect that in the next couple of months - but I'm always early. So, more than likely either by, or right after, Christmas. Inflation based on velocity is about 5 years away at minimum - that means loss in the value of the dollar and inflation based on dollar valuations in foreign currencies.

Aug 19 01:27 PM

[manya05:]

I have to say that WB's writing does not impress me, sounds like flub for the masses, nothing insightful, possibly even wrong. Yes, I see all those dollars being printed, but they are not going anywhere, they cannot go anywhere. I see no inflation, I think we are still within the danger zone of deflation. If we get inflation, it will be of the worst kind, when the dollar drops hard and we fall into an economic hole and all imports (pretty much everything we consume) starts looking really expensive.

Aug 19 01:37 PM

[EddieTa:]

I think it's interesting that Buffett writes these op-ed for the Times instead of The Washington Post, of which Berkshire owns 18.4 percent.

Aug 19 01:56 PM

[Surly Trader:]

Regardless of current CPI levels, the Fed has effectively printed a boatload of money and put it out in the economy. The reason that inflation has stayed low is because the velocity of money has fallen off a cliff. Basically, most of the money is sitting on bank balance sheets because they are afraid to lend. As soon as they start feeling better (which some have posited will be mid 2010) and start lending to consumers, the velocity of money will take off and inflation will rear its ugly head. The central banks need to pull all of that excess money supply quickly in order to stifle inflation. There is a caveat though, The fed will not be able to sell all of the MBS (mortgage backed securities) to investors (about $1 Trillion in total) because under this scenario long term interest rates would be higher meaning that all of the MBS that the fed bought at 5% interest rates would be underwater in price. That effectively means that in order to take that trillion out of the money supply the fed would have to take a loss on those investments which would effectively be a direct tax on the US Citizen. I do not see that happening. We are going to see inflation in the future, it's just a question of when it emerges. That question can only be answered by knowing when the banks will start lending liberally again and consumers start spending.

Aug 19 02:04 PM

[noblepaladin:]

In the short run, we'll have what seems like deflation. In trader terms, when you borrow money and you buy stuff, you are basically "shorting" the dollar. And what happens when everybody in the country is borrowing aka "shorting" the dollar is a massive short squeeze when people need to pay back their loans or "cover". But make no mistake, the money isn't contracting it is expanding. Just because AIG, Freddie, and Fannie stock had huge spikes in stock price, that doesn't mean they have fundamental value behind them - they're simply out of the money calls that somehow all the debt holders and the government will be paid back.. The same with the dollar, more and more is being created and fundamentally that is inflationary. But in the short term, we won't see it yet as consumers are desperately trying to get their hands on dollars to repay loans and de-leverage.

China and other foreign countries have been acting as an inflation buffer. While the government has been printing money for a long time, China has been soaking it all up and hording it, so we don't see that money in circulation. One of these days, the Chinese will want to buy something with their money. They are not going to horde IOUs forever. When that time comes, all that printed money will flood the system at the same time.

Aug 19 03:36 PM

[nmelendez:]

On Aug 19 11:40 AM John Lounsbury wrote:

Louns,

You are both right. Your forecast is 10 to 12 years down the road. Ace's prediction are for the next 10 years. As the market deflates and credit bust really takes off you will see prices collapse as demand for dollars, not credit, is the enabling factor.
So for now deflation with a future prediction for inflation. Now here's the tricky part to make the buck, timing!!!!!


> Market Ace - - -
>
> You wrote:
>
> "I think the inflationist are missing a very important point They
> mistake those green pieces of paper that Bernanke keeps printing
> and dumping on the banks so they can buy US Treasuries as money and
> this "excess" money will cause inflation."
>
> I feel you have argued well, but missed one point. There is inflation
> and the bubble is now in Treasuries. My view is that when this bubble
> breaks the next inflation bubble will be in commodities (basically
> the dollar and other currencies undergoing devaluation). While inflation
> in Treasuries can occur without flowing through to what people buy
> (in fact Treasuries can bubble when there is deflation elsewhere).
> With the commodity bubble, rising costs will flow through to consumer
> prices and broader inflation will occur.

Aug 19 05:31 PM

[CC_Gold:]

Consumer Price Inflation/Deflation is a phenomenon caused by printing excess money and asset inflation/deflation is caused by credit contraction/expansion so get it straight.

Aug 19 06:45 PM

[rick12345:]

Open an economics text-book and look up the word "multiplier". Unless the Fed decides to tighten fiscal policy in the future, there will uncertainly be inflation. Bernanke knows this, Buffet knows it, and just about anyone with half a brain knows it. Of course finanace deals in statistical analysis and risk aversion, so I wouldn't expect financiers to look any further than the technical interpretation of charts and their significance in a "present value" sense.

Aug 20 04:32 AM

[Avooch:]

M3 my darlings

M3

Aug 20 08:59 AM

[blacksilver:]

isn't gold the best hedge against inflation?

Aug 20 09:41 AM

[CC_Gold:]

silver generally outperforms gold in an inflationary environment while gold outperforms silver in deflation. I would own both!

Aug 20 09:53 AM

[Dave Shafer:]

I don't see TARP as inflationary. Money was sent to banks to shore up their balance sheets to cover loan losses. It doesn't increase the money supply, just covers losses. When the losses decline the banks pay it back + a little surcharge. Everybody wins. The banks remain functional and can start loaning again, the government gets its money back with a little extra.

As to the stimulus package. It probably will increase inflation, but not to the degree everyone is predicting. Of course, the FED will have to time the interest rate hikes correctly!

Aug 20 10:54 AM

[Paul H:]

Inflation won't take off until American asset reflect prices that are more in line with a bankruptcy liquidation. Make no mistake, the rest of the world is pissed at America and licking their lips as we squirm.

The Chinese people suffered for decades because we kept them out of world trade. They will wait until things are a whole lot cheaper here before they start buying our sky scrapers. I don't look for inflation for some time to come.

Before America can every become a competitor in the world again our wages will have to be closer to what the average Chinese earns.

Credit made us rich and will now make us poor. When 80% of our (pretend) GDP comes from selling stuff back and forth and most of the remainder is government spending projects, we are in a far different world then when we had all the oil and we were the industrial giant of the world. We were barely able to come out of the great Depression with those two big tickets in our pocket. As a betting man, I'm looking for a new country where food grows year around and the masses are al ready poor.

Aug 20 12:49 PM

[Tony Daltorio:]

John Lounsbury comment is spot on. The Fed's trillions have created the biggest bubble in financial markets history - the Treasury market bubble. When that bubble bursts, it will be like Humpty Dumpty - Ben B. will not be able to put it back together again.

Aug 20 02:51 PM

[E Nuff Sed:]

Towards the end of his classic 1977 article Fortune notes " And why does a man who is gloomy about stocks own so much stock? "Partly, it's habit," he admits. "Partly, it's just that stocks mean business, and owning businesses is much more interesting than owning gold or farmland. Besides, stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices."

With the benefit of hindsight 1977 was the perfect time to be invested in stocks. The 2 massive bull markets that followed catapulted Warren from a mere millionaire to the richest man in the world.

www.scribd.com/doc/180...

Aug 23 04:44 PM