2015: What are the odds of high inflation?
CAROL LOOMIS: In your 2008 annual letter, you mentioned that a likely consequence of the Treasury and Federal Reserve’s action to stabilize the economy would be, quote, “an onslaught of inflation.”
Now that we are presumably nearing the time when the Federal Reserve will begin raising interest rates, could you share your thoughts regarding both the likelihood of accompanying high inflation, and the consequences that might follow?
And if high rates of inflation did occur, how would the consequences for Berkshire compare to those for most large companies?
And this question, I say belatedly, came from James Cook (PH) of Waterville, Maine.
WARREN BUFFETT: Well, so far we’ve been very wrong — or I’ve been very wrong. Charlie has probably been a little bit wrong, too. (Laughs)
CHARLIE MUNGER: Of course.
WARREN BUFFETT: Yeah. The —
No, I would not have predicted that you could have five or six years of, you know, close to zero rates, and now get negative rates in Europe, and run fairly large deficit, although the current deficit is not that large. I mean, the country could sustain on average, you know, 2 or 2 1/2 percent deficits forever and not increase the ratio of debt to GDP. So the word “deficit” is not a dirty word. But very large deficits, and sort of uncontrollable, are scary.
But, you know, we’ve taken the Federal Reserve balance sheet up from a trillion to over 4 trillion, and we’ve done a lot of things that weren’t in my Economics 101 course, and so far nothing bad has happened, except for the fact that people who saved and kept their money in short-term savings instruments have just totally gotten killed, in terms of their — the income that they received from that.
But it’s still hard for me to see how if you toss money from helicopters that eventually you don’t have inflation.
Certainly, if the money supplied grows faster and faster relative to the output of goods and services, something like that is supposed to happen.
But I’ve been surprised by what’s happened. I’ve been — you know, when Poland issues bonds at negative interest rates, you know, I did not have that list — in my list — of forecasts a few years ago.
And so I think we’re operating in a world that Charlie and I don’t understand very well and that —
And to the second part of the question, I think Berkshire, in almost any kind of environment, will do better than most big companies.
I mean, we are prepared for anything. We’ll always be prepared for anything. And if we see really unusual opportunities, we’re also prepared to act. And that gives us a real advantage over most big companies.
We don’t count on anybody else. We’re sitting with over 60 billion right now. I’d rather be sitting with 20 billion and made a great $40 billion acquisition.
But we will — you know, we will be very willing to act if economic turbulence of any kind occurs, and we’ll be prepared and most people won’t be.
Charlie?
CHARLIE MUNGER: Yeah. We have made very little progress in life by trying to outguess these macroeconomic factors. We basically have abdicated.
We’re just swimming all the time, and we let the tide take care of itself.
WARREN BUFFETT: And we really don’t see — we’ve not seen great successes by others who have been all involved in macro predictions. I mean, they get a lot of air time, but that’s about all that happens.
CHARLIE MUNGER: The trouble with making all these economic pronouncements is that people gradually get so they think they know something. (Laughter)
It’s much better just to say, “I’m ignorant.” (Laughter)
WARREN BUFFETT: Yeah. We will find things, though, under any circumstances.
They don’t come at an even flow. They may not — and, you know, you cannot predict the size or anything — but you can be sure that over the next ten years, you’ll see a lot of things you didn’t think were possible.
And we will occasionally see something that makes sense for Berkshire, and we will be prepared to do it both psychologically and financially.