2005: How will the US's large budget deficit resolve itself?
AUDIENCE MEMBER: Good afternoon, gentlemen. I’m Thorsten Kramer (PH) from Cologne, Germany.
You’ve criticized the extraordinary large stake that the financial sector in the United States is currently representing in relation to GDP, which is also reflected in a total credit volume exceeding GDP by roughly 250 percent, significantly up from the level we’ve seen a decade ago.
A current account deficit and budget deficit running at 6 percent of GDP, in combination with a still accommodating easy money policy, and high asset prices, will have to be consolidated sooner or later.
How do you think the adjustment will take place? What are your two most likely scenarios how these huge imbalances might be consolidated? And is the dollar devaluation scenario your most favorite one?
WARREN BUFFETT: Well, as I said earlier, I don’t see how the situation resolves itself with a stronger dollar.
Most people still seem fairly sanguine about the fact that there won’t be anything terribly bumpy about it, that there’ll be this so-called soft landing.
And I don’t know whether that’ll be the case or not. But I would say that we’re running the risk of having markets that could get chaotic if certain events converged, superimposed upon those factors that you just listed.
But I don’t — I’m not an Armageddon type at all on the economy. I mean, the things you named are important factors.
I think that absent something happening in the terrorism field, I think that, you know, the citizens of the United States, on balance, will be living better ten years from now than now, and 20 years from now than now.
But I do think that we’re following policies that are unwise. But we’ve done that plenty of times over history. I mean, [investor] Peter Lynch has always said, you know, “Buy a business that’s so good that an idiot can run it, because sooner or later one will.” (Laughter)
We’ve got a country that’s so good that we can have policies that are counterproductive — (applause) — and we’ll still come out OK.
Just think of what we’ve had over the years. I mean, you know, Warren Harding, Chester Arthur?
I mean, we’ve had a lot of things in this country. We had the Civil War. We had all kinds of things over the years.
But the society has marched forward, with some fits and starts, but still at a very significant clip.
The real GDP per capita is seven times, in the U.S., what it was a hundred years ago. Just think of that. One century in the human pageant, and a sevenfold increase in GDP per capita. It’s remarkable.
So, I acknowledge, you know, consumer debt doing what it’s done and the trade deficit being what it is. And I think that those things — particularly the trade deficit — should be addressed, and promptly. But I don’t think they pull down the whole place.
They may create, you know, very severe dislocations in financial markets from time to time. But that’s been the history of this country. I mean, we have had very dramatic things happen in financial markets over the years. And the country survives despite that.
And sometimes there’s great opportunity in those dislocations. There’s likely to be.
So I’m not pessimistic about the U.S. at all. You know, I can’t imagine anyplace that I would rather be.
But whether — when you say the two most likely outcomes, I think the eventual outcome is that the country does fine. But I think a — there’s a significant possibility that you do have some chaotic financial markets at one time or another. But we’ve had them historically.
Charlie?
CHARLIE MUNGER: Yeah, we don’t have any great record as macroeconomic predictors. And I don’t see any reason why we should really start now.
Obviously, there are more chances for convulsion now. I mean, everybody from [former Federal Reserve Chairman] Paul Volcker on has looked at the current figures and said we could have some kind of convulsion as a consequence of (inaudible). Apart from knowing that, we have no contribution to make.
WARREN BUFFETT: Yeah, I do think, as I mentioned earlier, that far greater sums, relatively, in one asset class after another, are held by people who — where it’s really on a hair-trigger type mechanism.
So, the creation of lots of new financial instruments, the piling up of huge amounts by intermediaries or agency activities in terms of money management, I think they lend themselves to more explosive outcomes on any given day than might have been the case some years back when I was selling utility stocks to people, a hundred shares at a time in Omaha.
I mean, those — that money was not on a hair-trigger basis. But as you turn it over to fund managers who think their job is to beat the S&P in — on a short-term basis — you are getting very short time horizons on huge amounts of money.
And those people may think they are operating independently in one sense. But they’re responding to the same stimuli. And they can, as they did in the fall of 1998, they can all head for the exits — or try to head for the exits — at one time.
And the thing about financial instruments is there is no exit. I mean, the only way that you get rid of a financial — the only way you leave your seat in a burning theatre in financial markets is to find somebody else to take the seat. And that is not always easy.
CHARLIE MUNGER: I think it —
WARREN BUFFETT: However — go ahead.
CHARLIE MUNGER: — I think it’s also true that the amount of credit being used, not only by hedge funds but by ordinary investors, is way heavier than most people realize.
It wasn’t even controversial in this country when we came to introduce single-stock futures and what — you know, commonly traded puts and calls.
And ordinary people got in trouble. If I’d been running the country, I never would have allowed that. I don’t know what good it does for the country to have a wonderful — a lot of trading in puts and calls.
One of my children knew a nice man who had a $2 1/2 million house and $5 million worth of wonderful securities.
But he couldn’t live as comfortably — he never worked — as he liked to live on the income from his $5 million of securities. And he got in the habit of picking up easy money with the credit systems of the world. He kept selling naked puts secured by his account, including puts on a whole lot of internet stocks.
And in due time, he didn’t have the $5 million of securities, and he didn’t have the house, and he now works in a restaurant.
That kind of self-destruction wasn’t possible before we created all these wonderful trading opportunities involving credit.
It was not a smart thing for this country to do, to legalize gambling everywhere and to bring it in a more facile form into our investment practices. (Applause)
WARREN BUFFETT: Is there anyone we’ve forgotten to offend? I mean, we — (Laughter)
CHARLIE MUNGER: Yeah.
WARREN BUFFETT: — we don’t want to miss anyone. (Laughter)