I’m still plowing through the CNBC transcript of their discussion with Warren Buffett the other day. There is a lot of common-sense economics in his answers, especially when he talked about the inherent regenerative powers of a capitalist system. However, he got steered onto the topic of monetary policy, and what he said was pretty enlightening:
BECKY: Warren, let’s go back just to Fed policy and some of the things that are happening. Joe mentioned earlier about the idea that the government, not just this government’s printing money.
BUFFETT: Absolutely.
BECKY: Is it about to overtake us? You start to worry about inflation?
BUFFETT: Yeah. It— you know, in— I think, you know, we’ve got major problems. And we’re— and I said, we’re always going to have problems, so this does not mean I’m bearish on America or anything. But we have a situation in Congress where we have a 10 percent deficit in terms of GDP, and we may be drifting into even larger numbers. I mean, we’ve made promises that— for the future that are really kind of inconsistent with the revenue streams we’ll have. There are three ways of solving that: breaking the promises of modifying them, taxing a whole lot more, or inflating your way out of it. And inflation is the— is the ultimate tax. I mean, it taxes people who don’t know they’re being taxed. It taxes people who believed in paper money, who believed in their government. It’s a particularly— you know, I find it— it’s almost a— it’s not the way government should be behave, but they do behave that way. And it’s the easiest thing to do. I mean, we…
BECKY: Do you think we’re intentionally doing that right now? Do you…
BUFFETT: Oh, I don’t think it’s so much intentional, but it’s the fact we don’t want to do the other things, and so it becomes the default option. And we are doing things— we are following policies that will lead to lots of inflation down the road unless changes are made. And once— inflation is the kind of thing, when it gets started, you don’t even— you don’t particularly notice it. It’s a little like a guy, you know, jumping off a 50-floor— out of a 50-story building. The first 45 stories, he really doesn’t notice a lot of change, you know, in his circumstances.
BECKY: Mm-hmm.
BUFFETT: But eventually you hit the ground. And there is no way you can run the kind of deficits we’re running and following other policies, and this is true around the world, without it being enormously inflationary. And no politician is going to come out and say we’re really going to solve this by making our money worth less. But— I mean, it’d be suicide to do it. But that is— that’s the practical effect of the policies that are being followed now. You know, they’re not written in stone, they can— they can be changed. But the easier course for governments to follow always is to inflate, and that’s why paper money— and I don’t disagree with your viewer that wrote in. I mean, paper money generally has a lousy future.
BECKY: Mm-hmm.
BUFFETT: And I, you know, a couple of years ago when people were running to cash, I said, you know, it’s the worst thing you can have. I mean, there— the one thing I can guarantee will not work well as an investment is cash.
It’s very clear that Buffett thinks you are far better off owning productive assets than cash. And he is well aware that inflation will be the practical effect of the spending policies being followed now. If you or your clients are still in a foxhole with your bond portfolio, it might be time to revisit that decision. Think carefully about what kind of an investment policy will generate a real return for you—and then hang on through the inevitable ups and downs.
Posted by Mike Moody 
