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Steve's note: Our good friend Addison Wiggin at Agora Financial sat down with Warren Buffett for an interview. He published that interview in his new book, I.O.U.S.A – One Nation. Under Stress. In Debt, which is out this week. Somehow, Addison managed to interview the most important money men in the world... including Buffett, Alan Greenspan, Steve Forbes, Paul O'Neill, Paul Volcker, Robert Rubin, and more.
If you're interested in how we got where we are right now, I highly recommend you read Addison's new book. I particularly enjoyed the interview below...
Saturday, October 11, 2008
On our national debt problems...
We're transferring small bits of the country – ownership of the country, or IOUs – to the rest of the world. But our national pie is still growing.
We're like a very, very, very, rich family that owns a farm the size of Texas, and we have all this output coming from the farm. Now, because we consume a little more than we produce, we're selling bits of that farm daily, a couple billion worth. Or we're giving a small mortgage on it which we don't even notice, but it builds up over time.
So even though we own a little less of the farm, or we create these IOUs against it, our equity in the farm actually increases somewhat. That's why people will benefit over time. But they won't benefit as much as if they hadn't given the IOUs or sold off little pieces of the farm.
Over time, people have dug up gold from the ground in far remote areas and then they've shipped it thousands and thousands of miles. And they've put it in the ground over here and hired guards to stand over it. So the real utility of gold is not that high. It's been something that people turn to, but it has not been a very good investment.
On China and globalization...
In 1790, there were about 4 million people in the U.S. and about 290 million in China. They were just as smart as we were. They had a climate that was about the same as ours. And yet we did enormously well over the next 217 years... as compared to China.
Now, why did we do that? Well, we had a market system, a rule of law, and equality of opportunity... and that system unleashed the potential of citizens in the United States to an extent far greater than in many countries including, up until recently, China.
About the risk of default of U.S. government bonds...
The U.S. government bond is absolutely certain to be paid. It's just total nonsense when people talk about the U.S. going bankrupt. I mean, the U.S. government will always pay its debts. The purchasing power of the dollar you receive is likely to be less than the dollar you invested, so you have purchasing power risk... But you should not be afraid of government bonds in terms of being paid.
The unique situation in the U.S. now...
Many years ago, when we lent a lot of money to various emerging countries and were having trouble getting paid back, somebody said that they found it very hard to imagine some Philippine or Thailand worker spending a couple of extra hours every week in the hot sun merely so Citicorp could increase its dividend twice a year. At a point, people say, "To hell with it."
It's much easier just to inflate your way out of it. If you're a South American or Asian country that owes money in dollars, it gets very binding to pay back in dollars. But if you owe it in your own currency, you just print more currency. And we have the ability to print currency. We can denominate debt in our own currency, whereas many countries can't because people don't trust them.
On government economic policies and crises...
We came fairly close to the whole system imploding in the 1930s because of economic conditions. People became very responsive to communism... When people are scared about economics, they'll listen to whoever is the most persuasive... One thing I don't like about the consequences of sustained large trade deficits is I think it makes the potential for demagoguery and really foolish policies more likely over time.
When you think about the history of this country, our economic policies have been pretty darn good. I mean, any country that delivers a seven-for-one increase in per capita living in a century has done an awful lot of things right. It's never happened before in the history of mankind.
What the right policies are...
You want a system where Mike Tyson is fighting for the heavyweight championship and Jack Welch is running General Electric. But you don't want Mike Tyson to be running General Electric and Jack Welch in the heavyweight championship. Government allocation of resources has tended, too often, to misallocate, and I think a market system does a pretty good job of allocating.
It's been a marvelous time to be alive. It wasn't really a whole lot better to live in the fourth century BC than the fourth century AD. But it's been a lot better to live in the year 2007 than it was in the year 1807.
...Even those on the low end are doing far better than people on the high end were doing 100 years ago. There're many, many things that a person earning a normal wage in this country can do and enjoy that John D. Rockefeller couldn't do and enjoy. So a rising tide has lifted all the boats... The average American is going to live better 10 years from now, 20 years from now, and 50 years from now.
THE GREAT 2008 OIL CRASH
During the great commodity rally of 2008, nothing received more attention than oil... and it's no wonder; crude rallied about 50% from January to July.
Oil rises when economies are doing well... when there's plenty of manufacturing and transporting of goods and people. It does poorly when economies go into the tank.As you can see from our chart of the week, economies around the world are shrinking... and oil just reached a new 2008 low. Trend watchers call this sort of price action a "breakdown." If the trend of lower employment, lower manufacturing,
and lower asset prices continues, this breakdown
will get much worse.
– Brian Hunt