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2006: What does Buffett think of the US's trade imbalance?
AUDIENCE MEMBER: Good afternoon. My name is Yuji Siamoto (PH) from New York City.
I would like to ask Mr. Buffett regarding your views in respect to currency: the renminbi, the yen, and the euro, in particular.
During the visit by Hu Jintao, this issue of the currency level had become a big issue. And increasingly, this is becoming a very, very important issue for economic health of this country.
United States is becoming highly dependent on very cheap, underpriced Chinese exports in all consumer goods. You go to Walmart, and most of the high product — high-end product electronics — or most of the — any value-added products — are manufactured in China.
U.S. is almost addicted to very low-priced Chinese goods, thanks to artificially maintained currency level. At the same time, U.S. is becoming addicted to very cheap capital from China and Japan, as they provide infusion of capital to U.S. Treasury markets, thus keeping the interest rate low for mortgage rates.
I see a great danger if this is maintained for long time, as U.S. becomes addicted to this cheap Chinese or Asian exports for all our consumption, and also for all of our cheap mortgage rates.
And this is almost like being addicted to opium, as Chinese were addicted to opium during Opium Wars.
And should government try harder to break this vicious cycle? And, if so, what would you think about the currency level?
And you have — previously, you have held very strong views about the dollar, but what are your views now, and are you capitalizing on your views on the currency?
WARREN BUFFETT: Yeah. Well, my views — and Charlie may disagree — but my views are strong as ever, perhaps a bit stronger. The — we are doing less directly in currency futures because the — as I explained in the annual report — the carry cost has gone from being positive to quite negative.
So there are better ways, in my view — considerably better ways — of mitigating the consequences of the dollar becoming a lot weaker in the future.
We like the idea of developing earning power in other currencies around the world, and, in effect, in ISCAR itself, the — a large portion of the earnings are not in dollars, and we’re doing it in other areas as well. We will hold less in currency futures unless the carry picture changes.
But the fundamental picture, what, in my view, is almost — you never say “certain,” but a very high probability of happening, is that the U.S. currency weakens over time.
No idea about the next 6 months or year or anything, but over a long period of time, weakens against other currencies because we are following policies that don’t seem much — don’t seem to leave much alternative.
Here is a quote referring to running a large current account deficit that was given on February 28, 2002. The quote is, “Countries that have gone down this path invariably have run into trouble, and so would we. Eventually the current account deficit will have to be restrained.”
Now, that was said by a very smart fellow whose name was Alan Greenspan. And at that time, the current account deficit was 385 billion, and it will be more than double that now.
So here, 4 years later, we have gone down that path, which he talked about, and we’ve gone faster and faster down the path. And he says, invariably, it runs into trouble.
Now, in his later years as Fed chairman, he did not emphasize this view as much. He never repudiated it, but he sort of talked about other things more.
But it — it’s going to lead to something, and it — in my view, it’s likely to be something significant. And people talk about a soft landing, but they never explain to me exactly how it’s going to take place.
And Chairman Bernanke recently gave a talk where he said the probabilities were that the ending would be good but that he couldn’t rule out the possibility otherwise.
I think you will see significant consequences at some point. We will have, at Berkshire, a fair amount of our earning power coming from other countries with other currencies, but we will always be primarily in the United States.
And, you know, we may — one consequence certainly seems possible is significantly higher inflation as the years go by.
Because as you owe more and more money as a country, it gets more and more tempting to devalue what you owe by paying in a cheaper currency than in the one in which the debts were incurred.
Charlie, what do you have to say on this?
CHARLIE MUNGER: Well, I don’t feel I have any special capacity to predict whether the euro was exactly priced right, right now. I don’t consider it a big deal that Berkshire has had the position it’s had.
In effect, about half of our surplus cash was stashed short-term in currencies other than the dollar. I regard that as almost a nonevent. Now, as it happened —
WARREN BUFFETT: Well, we made a couple billion dollars off it. (Laughter)
CHARLIE MUNGER: Yeah. I was — as I was about to say, that as it’s happened so far, it’s been a very profitable nonevent, but... (Laughter) Generally —
WARREN BUFFETT: If it doesn’t mean anything to him, he can always give his share to me. (Laughs)
CHARLIE MUNGER: Yeah. Generally speaking, it can’t be good to be running a big current account deficit and a big fiscal deficit and have them both growing.
I mean, a great civilization may be able to stand something like that for a way longer period than you might have thought at the outset.
But you think that in the end, there would be a comeuppance and that we would have to change policies, perhaps painfully. In fact, I would say almost surely painfully. Wouldn’t you, Warren?
WARREN BUFFETT: Yeah, I would. And it’s interesting because I think almost everybody says it’s unsustainable, and then they never explain how it doesn’t keep being sustained until something comes — very unpleasant comes along.
But then they also say that there will be a soft landing, and I don’t always get from A to B to C when I listen to them. The —
Certainly the longer it goes on, the greater the credit — the greater the net debtor position the United States is in, the more people see that we are, sort of, addicted to this kind of behavior, the more chance there is at some point, probably brought about by some other extraneous affair, that currency doesn’t —
There aren’t some big adjustments that take place and, perhaps, some chaotic markets in which currency adjustments play a part. But knowing when or exactly how, it’s impossible to say that sort of thing — predict that sort of thing.
Charlie and I, in the 1980s, saw something called “portfolio insurance” — and that was a very popular term then — catch on with institutions.
And what happened was that a group was around selling the idea that this was a sophisticated, superior way for large institutions to manage money. And they charged appreciable sums for people — to people — to set up mechanistic procedures for dealing with stock market fluctuations.
They did this with pension funds and various big guys. And it was very popular, and the academic literature was full of it, and people were teaching about it in the schools.
And then October 19, 1987, came along, and a relatively small portion of American money invested — American investments — were being guided by this portfolio insurance doctrine.
But just that small amount of money was a leading factor in producing a 22 percent change in the value of American stocks in one day.
Every one of these people individually thought what they were doing was intelligent, but, when aggregated, and having to follow a given signal, in effect, you created a doomsday machine. It was out of control, and some really chaotic things happened then.
I would say the potential for that sort of thing — not that exact thing at all, but that sort of thing to happen in the world ahead is — it’s probably magnified quite a bit from what existed in the ’80s.
And currency enters into it, but it’s not — who knows where it starts or exactly why somebody yells “fire.” But when “fire” is yelled, there will be — the currency markets will play a part in the rush for the door.