"New Money, Old Habits"
Buffett goes to cash, Friedman shirks
gold and the economy goes to hell...
by Bill Bonner
"Out of the crooked timber of humanity,
no straight thing was ever built."
~ Immanuel Kant
Baltimore, Maryland - "Today, we write about a straight thing…that got a kink. Financially+ says: "Warren Buffett's Advice To Nervous Investors: 'Incredible Period' For U.S. Economy Growth Is Coming To An End." "Buffett’s recent cautionary remarks mark a significant departure from his usual optimistic view of the U.S. economy. So, what has led to this change in perspective? It’s a combination of several factors, including persistent high inflation, escalating interest rates, and an ongoing banking crisis. These challenges have collectively contributed to Warren Buffett and his longstanding business partner, Charlie Munger, adopting a more prudent stance regarding the prospects for investment returns in the upcoming year. Munger succinctly summed it up by saying, “Get used to making less.”
The duo’s cautious outlook for the economy is also mirrored in Berkshire Hathaway’s investment portfolio. The company was a net seller of equities in the first quarter of 2023, generating $10.4 billion in proceeds after accounting for purchases. Consequently, Berkshire’s cash reserves swelled from $128.6 billion at the end of the previous year to approximately $130.6 billion."
Yes, Buffett and the late Charlie Munger were both geniuses. But they also had the good fortune to be alive and investing at a time when America’s central bank was pumping trillions in new ‘liquidity’ into the markets. That period is over. And Buffett is doing what we recommended: going to cash. This new phase began in July 2020. Its actual shape and distinction? We don’t quite know yet. But it is different in every dimension from the period that made Buffett and Munger rich. Let’s look back.
Financialization and politicization: The period, 1950-1980, was arguably the high water mark for America. It was then that Buffett learned, from Ben Graham, to buy good companies cheap…and hold them for a long time. Later, he learned from Munger to buy them at fair prices; getting them cheap was nice but not necessary.
But in 1971, the US straightened out its money system…and by 1980, the new system was already bending and twisting the entire economy. Before 1980, almost all the comparisons and all the measures were favorable to the US. Trade, exports, jobs, incomes, art, culture…you name it; America was number 1. After 1980, almost all the indicators slipped and slid… Among them were these not-much-noticed but revealing details.
Real wages for ordinary people rose about 2.3% per year in the first period. In the second – since 1980 – they’ve been flat. The October 2023 report on inflation-adjusted wages in the goods-producing sector shows no gain since October 1978.
Second, government transfers as a percent of GDP were less than 10% before 1980. After, they rose to almost 20% by 2020 and have now settled back down to 15%.
There was a twist. After 1980, the percentage of the total output that was spent by someone who didn’t earn it went up. The post-1971 money system favored ‘financialization” and politicization – not new products and services. If there was an increase in overall wealth, it did not go to the wage-slaves who earned it. It went to those who got the ‘transfers’…and to Wall Street.
Crooked Timber: The real economy is composed of people who offer goods or services to others…in exchange for money…which they use to buy goods or services from others. That was how the pre-1980 economy did so well. Providing better goods or services increased real wealth. So wages rose.
Post-1980 was a different story. The new paper was more flexible...and more easily persuaded to go into the pockets of those who controlled it. This new money system was largely Milton Friedman’s creation. He thought he could eliminate inflation and deflation by taking gold out of the picture. Henceforth, people would have no option but to stick with the government’s paper…and no reason not to.
Friedman was a brilliant economist, but not a very good judge of crooked timber. In his theoretical world, economists at the Fed would allow an increase in Fed holdings (which replaced gold as the system’s ballast) of 3% per year. No one would have any reason to fear inflation – because the geniuses at the Fed wouldn’t overdo it. And no one would have reason to fear a Great Depression-style meltdown either…because the Fed could feed an infinite amount of ‘liquidity’ to the banking system, making a system-wide deflation almost impossible.
New Money, Old Habits: But in the real world, people are neither always good, nor always bad, but always subject to influence. And the influence of being about to ‘print’ money has always triumphed over prudence and propriety.
As we saw yesterday, the Fed consistently increased the money supply above and beyond the rate of GDP growth…reaching 9 times Friedman’s 3% target during the worst of the Trump years. This new money wasn’t earned; it was borrowed. Mostly by Wall Street and the federales themselves. And here we see the result: Total debt to GDP was about 150% in the first period, 1950-1980…and went to 350% in the second period, 1980-2020.
The new ‘money’ directly increased our collective debt, indirectly increased prices for stocks and bonds….and made Buffett and Munger a lot of money for themselves and their shareholders. That chapter has now come to an end. Today’s story – economic, financial, political – is different in almost every way. In particular, the new liquidity has been borrowed and spent, but the burden of debt remains…along with the inflation/deflation debt crisis that Milton Friedman thought he had avoided.
Tomorrow…we’ll let Former Ambassador to the Soviet Union, Jack Matlock, explain how the US has changed politically."
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