2001: Do American consumers have too much debt?
AUDIENCE MEMBER: My name is Martin Mitchell (PH). I’m from Bakersfield, California.
My question, a two-part question, is concerning debt. We know that individual debt can be devastating.
Do you — are you concerned that the American consumer is so far in debt, as a whole, as to be a problem?
And part two is, do you feel that our trade deficit with other countries is of concern to you?
WARREN BUFFETT: Well, the first question about debt, I think it’s very hard to answer about the consumer as a whole. I get letters every day from people who have problems in life. And they revolve — I mean, they’re either health or debt. And usually — frequently — the debt is connected with health, you know?
But they — it’s been very easy for them to borrow money, and they’re in over their heads, and it’s all over then.
And there’s no question that the American consumer is somewhat more indebted, in aggregate.
But it’s a very hard thing, I think, to come into conclusions about whether it poses a serious problem. You know, most people have had assets, directly or indirectly, that have gained in value enormously, particularly in real estate and some in securities.
So there’s a greater capacity to carry debt as earning power increases and assets held increases. I don’t — I can’t give you a useful answer, in terms of the world as a whole.
But I constantly give advice to young people, and those are the only people I talk to, aside from our shareholder group: just don’t start out behind the eight ball.
I mean, it’s crazy to get in debt because it’s so hard to get out of debt. And, I mean, the idea of having credit card debt — and we issue credit cards in all our businesses and, you know, so does every other retailer.
But the idea of trying to borrow money at 18 percent, you know, and thinking you’re going to get ahead in life, it isn’t going to work.
And I urge people — they can use their credit card, but I urge them to pay it off before it starts revolving because it’s just — it’s too expensive.
Charlie and I can’t make money with 18 percent money. I mean, we’re looking around for float because we don’t want to pay 5 percent for money.
And, so I’m very sympathetic to people get in debt. But once you get in it, it is hell to get out.
I mean, Charlie will have a few Ben Franklinisms to quote on that subject.
In fact, you want to give a few from Ben now? (Laughter)
CHARLIE MUNGER: Oh, no.
WARREN BUFFETT: He’d love to, but I led him into it the wrong way.
WARREN BUFFETT: And the second question about the trade deficit, that’s a very interesting thing. Because when you run a trade deficit, what you’re doing is you’re trading assets of one sort or another for goods, beyond what you’re sending abroad.
So in effect, you are selling off a tiny bit of the farm so that the country can consume more than it’s producing. If you run a net trade deficit, the country, in aggregate, is consuming less than — or consuming more — than it’s producing.
And if you’re a very rich country, you can’t even see it because if you run a trade deficit of a few hundred billion dollars, you know, compared to an economy that’s maybe worth, what, 40 trillion or something like that, you don’t see it.
But you’re trading off a tiny bit of the farm every year to live a little bit better than if you just lived off the produce of the farm that year.
And you can do it with IOUs if you’ve got a good record. You can’t do it with IOUs if you’re a country that’s got a terrible record.
So they have to denominate their debt in dollars. And, of course, they don’t have the ability to denominate a lot of dollars, and people don’t want to accept a weak currency. So a weak country can’t get away with doing that, unless it’s getting special-type loans from agencies set up to do that.
We can do almost anything we want in this country, because we don’t confiscate property and we don’t — we haven’t destroyed a currency that the people have accepted, in terms of payment for their goods, over the years.
But I basically think a significant trade deficit over a long enough time is a significant minus for the country. You won’t see it though, day-by-day, or week-by-week, or month-by-month.
But eventually, if you trade for trinkets or whatever you’re getting beyond what you’re sending, and you trade away your assets —
Fortunately, some of the assets we traded not that many years ago, like movie studios and some of those things, the other people got the short end of the bargain on.
But by and large, it’s not a good policy for the country to run large trade deficits year after year.
Charlie?
CHARLIE MUNGER: Well, it’s — that’s certainly true if what you’re trading for is trinkets, or consumer goods, or something. But, of course, a developing country that ran a trade deficit to put in power plants and what have, that might be a very smart thing to do. In fact, the United States once did that.
WARREN BUFFETT: Yeah, we did it with railroads in a huge way, you know, and —
CHARLIE MUNGER: But under modern conditions, do we look like a twosome that would love a big trade deficit? (Laughter)
WARREN BUFFETT: No. It’s one thing to build railroads with the process, but it’s another thing, you know, to buy radios and television sets. I mean, it depends what you’re getting.
But by and large, we run a trade deficit on consumption goods. And that’s not a big plus over time.