Buffettology

Warren Buffett was at a fundraiser for Hillary Clinton in San Francisco last Tuesday. Here are some excerpts. My comments in blue.

Q: Your views on the US Dollar?

A: The most important question to ask in economics is "X happens, and then what?". We are living prosperously, but every day we are sending 2 billion dollars overseas because we consume more than we purchase. It is similar to if we owned, say, a large farm in Texas. We are extremely wealthy, but every year we mortgage a little bit of that farm in order to enjoy more of the present. And it is gradual, but then at some point you have to spend an hour or maybe two hours a week of your work to go towards servicing this debt. The problem is at some point either foreign investors will stop financing our consumption, or our future generations will be burdened with debt and have to work some X hours towards servicing the debt of the earlier generation. But the present over-consumption is unsustainable.

The persistently weak USD over the last 9 months is a reflection of central banks and governments moving away from holding pure US Treasuries (funding US deficit directly). Buffett had been bearish on USD for more than 5 years, only the USD really started to move the way Buffett (and most of the global view) predicted this year. Some governments holding large trade surpluses have set up Sovereign Funds to invest in large caps, a masked way of getting better returns from the surpluses or petrodollars. That trend will accelerate next year, hence we can probably see at least another weak year for USD. The rebalancing act has already started to work its way into lower deficits for the US, but we are not there yet, but its certainly working. The rebalancing has just started, we are probably one-third in the cycle to rebalance the USD.

Q: Your views on new products such as derivatives, SIVs, etc. ?

A: There's utility in securitizations. But the problem is these have become complex and the originators and investors have been stretched so far in part in the whole process.

Q: On Taxes.

A: In the U.S., 2 trillion out of 2.5 trillion in taxes come from income and payroll taxes. Of those, 60% is income taxes, and 40% is payroll taxes. I [Buffett] did a survey at Berkshire HQ and the average worker paid 33.2%. I paid 17.7%.

The worth of the Forbes 400 was 220 Billion in 1987, and for 2007 it is 1.5 trillion. A seven-fold increase. During the same period, wages went up only 80%.

Basically Buffett is saying the rich pay a lot less taxes, and he has been keeping quiet for a long time. Now that he has made his money and kept most of it from the government (or that he has pledged a substantial sum to the Gates Foundation), Buffett appears to be magnanimous in saying the government should close the loopholes which allow the rich to pay less taxes. I wonder why he did not say this 10 years ago?!!

Q: Sense for the future of our country, Warren?

A: In the 20th century, real standard of living increased seven-fold. That was unprecedented, and included the Great Depression and other scares. The American system has unleashed the greatest potential of its citizens. Back in 1790, China had 290 million people, and America had 4 million. But today look where we are at. We will be better off in the future, the real question is how it will be shared.


Basically we are at the starting edge of a new paradigm. Economic leadership will be going through the most turbulent of changes in terms of economic ownership, economic power will shift gradually, but overall economic leadership should still reside in the US, provided they play their cards right. Still, they will lose a huge portion of economic ownership, and some of the economic power.