Quote of the Day: Warren Buffett

That’s because bonds are as sound as a dollar – and we view the long-term outlook for dollars as dismal. We believe substantial inflation lies ahead, although we have no idea what the average rate will turn out to be. Furthermore, we think there is a small, but not insignificant, chance of runaway inflation. Such a possibility may seem absurd, considering the rate to which inflation has dropped. But we believe that present fiscal policy – featuring a huge deficit – is both extremely dangerous and difficult to reverse. (So far, most politicians in both parties have followed Charlie Brown’s advice: “No problem is so big that it can’t be run away from.”) Without a reversal, high rates of inflation may be delayed (perhaps for a long time), but will not be avoided. If high rates materialize, they bring with them the potential for a runaway upward spiral.

~ Warren Buffett, 1984

and

The faith that foreigners are placing in us may be misfounded. When the claim checks outstanding grow sufficiently numerous and when the issuing party can unilaterally determine their purchasing power, the pressure on the issuer to dilute their value by inflating the currency becomes almost irresistible. For the debtor government, the weapon of inflation is the economic equivalent of the “H” bomb, and that is why very few countries have been allowed to swamp the world with debt denominated in their own currency. Our past, relatively good record for fiscal integrity has let us break this rule, but the generosity accorded us is likely to intensify, rather than relieve, the eventual pressure on us to inflate. If we do succumb to that pressure, it won’t be just the foreign holders of our claim checks who will suffer. It will be all of us as well.

~ Warren Buffett, 1987

Grouch: The deficits of 1984 and 1987 look like rounding errors for today's deficits. All taxpayers and those who live off of the largess of the government should encourage him to voluntarily write larger checks to the US Treasury. But an even better idea is that perhaps we should establish a national lottery to have the nation's billionaires make charitable donations to fund the government for 5 - 10 minutes at a clip....... then when there are no more billionaires, we can move on to the millionaires and then when there are no more millionaires then the average Joe can start picking up the bill to fund the government at 5 - 10 seconds a clip. Wouldn't that be true social justice? Wouldn't that gradually reduce the smoke-screens politicians use to hide their incompetence and callousness in abusing American citizens through foolish and frivolous overspending.

Quote of the Day: Alexis de Tocqueville

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years."

~ Alexis de Tocqueville, from Democracy in America

Quote of the Day: Jeremy Grantham -- US on the Road to Zero Growth Long-Term

Summary

• The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
• Population growth that peaked in the U.S. at over 1.5% a year in the 1970s will bob along at less than half a percent. This is pretty much baked into the demographic pie. After adjusting for fewer hours worked per person, man-hours worked annually are likely to be growing at only 0.2% a year.
• Productivity in manufacturing has been high and is expected to stay high, but manufacturing is now only 9% of the U.S. economy, down from 24% in 1900 and 15% in 1990. It is on its way to only 5% by 2040 or so. There is a limit as to how much this small segment can add to total productivity.
• Growth in service productivity in contrast is low and declining. Total productivity is calculated to be just 1.3% through 2030, if we use current accounting methods.
• Resource costs have been rising, conservatively, at 7% a year since 2000. If this is maintained in a world growing at under 4% and a developed world at under 1.5% it is easy to see how the squeeze will intensify.
• Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%. The price rise might even accelerate as cheap resources diminish. If resources increase their costs at 9% a year, the U.S. will reach a point where all of the growth generated by the economy is used up in simply obtaining enough resources to run the system. It would take just 11 years before the economic system would be in reverse! If, on the other hand, our resource productivity increases, or demand slows, cost increases may decelerate to 5% a year, giving us 31 years to get our act together. Of course, with extraordinary, innovative breakthroughs we might do even better, but we certainly shouldn’t count on that. (Bear in mind that we don’t even know precisely why the prices started to rise so sharply in 2000.) Excessive optimism and doing little could be extremely dangerous.
• For a few years fracking will add helpfully to growth: my guess is that the benefit will peak at about 0.5% within five years, but be modest over longer periods. The key concept here for understanding growth is to know when the maximum upward push will occur.
• Increasing climate damage, reflected mainly in food prices and flood damage, is going to increase. With any luck this will not be severe before 2030 (we allow for a 0.1% setback) but it is very likely to accelerate between 2030 and 2050. A great deal will depend on our responses.
• The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050 (see table on Page 16). This is all done presuming no unexpected disasters, but also no heroics, just normal “muddling through.”
• Investors should be wary of a Fed whose policy is premised on the idea that 3% growth for the U.S. is normal.
• Remember, it is led by a guy who couldn’t see a 1-in-1200-year housing bubble! Keeping rates down until productivity surges above its last 30-year average or until American fertility rates leap upwards could be a very long wait!

~ Jeremy Grantham, from On the Road to Zero Growth


Grouch: I'm not as pessimistic in the long-run as Grantham, but I am pessimistic about US growth for the next 4 - 6 years. Much damage will be inflicted on the economy during that time by the "know-nothing" political do-gooders through legislation, excessive and foolish regulation, executive order, judicial fiat and monetary policy -- and by proxy average Americans will suffer through continued high unemployment and low wage growth. I'm optimistic longer term that Americans will grow tired of this war on prosperity by the political class and will replace the bums with some pro-growth cowboys. In the meantime, the entrepreneurs always provide glimmers of hope even in the darkest times.

Jack Bogle on Wealthtrack

I, Pencil -- The Movie

Leonard Read’s classic essay “I, Pencil,” is about how the manufacture of a simple (yet not so simple) pencil is coordinated by the marketplace rather than by a central planner. Milton Friedman later famously adopted it for his Free to Choose series.