Berkshire Hathaway
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10-Year Note at 1963 Levels

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By gdefelice
August 15, 2002

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The long TIPS yield is probably the best proxy out there for the anticipated real long-term growth rate of the economy. That yield peaked the week of January 21, 2000 at 4.38%. While the anticipated growth rate has declined by 164 basis points, the anticipated inflation rate hasn't dropped much. Back in early 2000 it was 2.35%.


Yes, yes.

But, let me ask another question. When Greenspan drops rate, the stock market cheers? Shouldn't the bond market be spooked, then?

I mean, what is the long-term downside to having rates below some optimal target...isn't it inflation?

If not, why not always have short-term rates near zero...let's drop them there and keep them there forever?

Free money for everyone.

Of course, that money will search out a home...either as an expenditure or in some inflating asset. For consumers, the currently inflating asset is houses.... banks borrow short (at the give away rate) and lend long at an artificially low rate created by the artificially low short rate. If you loan people or banks money for less than the market would, you have to create inflation down the road. If not, as I say, then there is no downside to low rates and they should always be zero.

I almost ALWAYS see economic growth tied to if economic growth is the cause of inflation. I don't buy it. Too much money in the system (growth of money supply exceeding GDP growth) is the cause...easy money and they still can't get the stock market to go any higher (for the first time EVER) but the housing market is. Greenspan even noted that the rising housing prices were far more important for spending than stock market wealth. And, that was supposed to be good news. Huh? What ever happened to being conservative? Why encourage people to take out equity and spend it right away...this kind of thinking is INSANE to me and dangerous for the long-term health of the nation.

I'm not saying we'll have terrible inflation anytime soon but, egad, what is the downside to easy money...asset bubbles and/or inflation. The Fed has now created two distinct asset bubbles -- one in the stock market and another in the housing market.

Will the deflation of those bubbles lead to deflation in the economy? All debtors sure better hope not, as the downward spiral is one I'm not convinced the Fed knows how to get us out of. I think Greenspan and the Fed are praying for signs of inflation, as the alternative knows no cure. What happens if we have junky economic growth, rising unemployment and short rates at zero or near zero. Then, what does the Fed do? Anyone? What's the cure then? I don't understand it, seriously.

If we don't see some serious inflation soon, Alan Greenspan will retire early...cause he doesn't want to be here for what happens in a zero interest rate, zero inflation environment.

I think the Fed is freaked out and that they wanted to lower rates yesterday but that they were scared it would spook all of us. The lower rates are coming and, god willing, we'll get some serious inflation since the alternative is a black hole.

If we get deflation and people have higher mortgage debt than ever before...good luck paying that back.

We'll see. I have no idea what the outcome will be. But, in all cases, I feel pretty safe.

I ignore the reported numbers on inflation from the Gov't, who reports those numbers like GE reports theirs. I don't buy the unemployment number and I don't buy the CPI number...I think they do all sorts of funny adjustments to both of them to "smooth" them out, etc.

I see prices rising. I see wages rising. Why are wages rising when the supply of workers is exploding? My guess is the wages are calculated to include the cost of health care, which is rapidly rising. So, the government says peoples' wages are rising but the money that goes into their pockets is stagnating or shrinking. Anyone know a lot of people getting large pay raises?

I know people who are having their wages cut. I see tax receipts down...way, way down.

What the hell is everyone else looking at? Will someone point me to the good stuff. How many 0% cars can one family buy? How many times a year can people refinance? Is there no bottom to the fuel that keeps consumers spending? How high can consumer credit go? How can you have a recession start and end but have housing prices rise the entire time, have consumer spending rise the entire time...that's not a recession, is it? No one retrenched, did they?

I submit, once again, that when long rates turn up, all of this will end. If they don't, things won't be good for anyone. So, yes, I think we're damned if you do and damned if you don't.

Sometime back, Buffett wrote a letter to his CEO's -- which was posted on this board -- in it he said he thought we were entering a recession that would be worse than most people thought. Yet, the opposite has happened. I submit, once again, we haven't entered the real recession.

It is fine if you disagree. I don't want this to happen but I think it will. And, thus, I want to be ready for it.

One last thing, people often refer to the 6% returns that Buffett posited for the market. But, go back and carefully read that article.

Here's what Buffett said:

If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate -- repeat aggregate -- would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from the nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And, if 4% is wrong, I believe that the percentage is just as likely to be less as more.

Okay, so what happens in a world of rising interest rates and rising inflation. Suppose inflation runs at 4%, that creates a 2% real return. What happens if rates turn up, there goes the rest of the real return.

I didn't and haven't ever found this analysis comforting...though its logic seems unassailable.

I know, I know, nobody likes a pessimist. Okay, then, don't worry, everything will be fine.

You know where the phrase "con man" comes from. Well the "con" is from the word confidence. If that's what you want, just listen to John Chambers or any other big name CEO. You can't really blame the administration though, can you? What are they supposed to say? Things are going to stink.

When Bush first was elected, they said that they were worried about the economy. I still remember reading articles saying, "Bush comments will cause a recession".

Let's be clear here, this disaster that will someday arrive was caused by Robert Rubin and Alan Greenspan.

Politically, that won't matter for Republicans, but that's the reality.

There is NOTHING the current administration can do because all of these problems are being caused by the Bubble and the Bubble was caused by 10 years of easy money and Greenspan puts.

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