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By gdefelice
October 28, 2003

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...on this board after Buffett's latest comments, you could hear a dollar drop.

Most of the responses regarding Buffett's latest comments revolve around the 'absurdity' of his proposal...both here and other boards and public forums.

Through my readings of Buffett's shareholders letters, I noted that there was one time that Buffett was really "wrong" and that was when he predicted terrible inflation and consequences from the deficit spending in the '80's.

Since that bad call, he has rarely ventured into macroeconomics on a level like the latest Fortune article does. He notes in this article that he was wrong before and he notes at the end of the article that the odds are that he will be wrong again. And yet, he has proffered a very ugly reality. Interesting, at the very least.

I too have learned that it is difficult to run a money management business on the assumption that there will be a terrible depression in equities even mentioning the mere possibility is 'dangerous'. If you're wrong once, you are done.

Some of the other comments I have read about Buffett's article suggest that he is talking his book or making a proposal to help "his companies and investments". I have doubts he is talking his book but that is possible. Rather, I believe he thinks things are really "this" bad. And, what is bad for his investments, generally, is bad for American business. About that, there can be little doubt -- on this score, I agree with the cynical...he is definitely trying to help his investments and if he can't, things won't go well for most of mine either. And, as he notes, if something isn't done, he believes virtually all of us will suffer more than if nothing is done and the "market" is left to its devices.

It is noteworthy, at least to long time Buffett followers, when Buffett mentions that he has made an investment in an asset class -- in this case foreign currencies -- that he has never made before. I believe his revelation is, as is often the case with his public comments, both a warning and a plea. The plea is to fix the system. The warning is that if we don't, the dollar will get killed, inflation will rise and wealth and living standards of the average U.S. citizen will fall. Or, at least they will fall further than if we try something to plug this hole sooner rather than later.

His suggested solution is unlikely to be enacted (just as his proposal to raise property taxes in California is unlikely to be enacted). In both cases, I think he knows that. Assuming he knows it is doubtful anyone will pay attention to his suggestions, why does he proffer them?

In the case of California property taxes, I believe his comments were meant to highlight just how serious a problem California faces. They were certainly foolish from a politician's prospective (and he was duly silenced after making them). But, I believe his proposal was simply a warning about how serious he thinks the situation in California actually is. We can (1) raise income taxes, (2) fire state workers (3) undo worker's comp. fraud or(4) raise property taxes -- most other "solutions" simply will not raise enough revenue or cut enough spending. Or, we could do a combination of all four (with other little contributors to help things along). I think he proposed raising the property tax because it would slow or kill the housing bubble and the equity extraction expenditures (cash out refinancings) which now are causing ever more trouble for Squanderville. There are no "good" solutions -- that is what I think Buffett is telling us and we just might have to attack sacred cows (like CA's prop. 13, which limits prop. taxes) in order to solve CA's problems.

Similarly, I believe Buffett's proposal for trade certificates is meant as a warning. He clearly feels extremely strongly about the fact that our current situation is unsustainable.

In a recent post I made entitled "China's game", I had trouble fathoming that China and Japan (among others) could keep taking our paper in exchange for their goods. I speculated that they must have a master plan. Buffett suggest that they would be better off buying real assets (those that can't be inflated away) and thus that they don't have a master plan. So, I think I was off target.

However, Buffett does still suggest that these countries -- esp. China -- are not playing with their eyes closed. But, rather, they are generally taking advantage of us because we have an open system and they do not. Free trade and globalization has gone one way, as between China and the United States, and it is in China's direction. Buffett says that can't keep happening and that other alternatives to his plan (most of which I and others seem to think are more likely than to happen -- if he had to bet, I would say he thought these other outcomes ARE more likely) will cause even more pain than his plan will. With his plan there is pain, without his plan there is more pain. I fall squarely in the "there is more pain" camp as being more likely than there is "less pain" because we have adopted Buffett's plan.

But, the upshot of it all is that he believes what is currently going on is unsustainable and suggests that we learn as much in "Economics 101" -- that is, this situation is so obviously unsustainable, that even a moderately educated college graduate has learned as much.

Rather than focusing on Buffett's proposed solution, I find it rather more interesting to think about the realities of the situation that has led to his proposal and the unpleasant potential ramifications of his ideas.

As we know from our studies of Munger, when people are presented with unpleasant information (and I would characterize Buffett's comments as unpleasant for the average investor -- certainly for this average guy), it is a tendency to blame the messenger. In this case, I only wish the outcome was under his control. However, I suspect it is not.

Then again, maybe he is just talking his book. He is always looking for an extra buck. I'm still looking at taking delivery.

gdefelice


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