The man who taught Warren Buffet

Clear analysis from Warren Buffet's Dad

A growing debt

Measured on a per-household basis America's federal spending habit has resulted in a national debt now about 7 times the one which caused Argentina's financial system to implode in 2001, and it’s growing faster than ever.

Many people are rightfully concerned. Even the occasional politician has tried to do something about it, but without much success. Suffering under the early phases of this conflict in 1948 Warren Buffet's Dad (who was a Congressman from Nebraska) memorably compared his role in the US government to a brave but ineffectual fireman:-

"There is only one way these spending pressures can be halted, and that is to restore the final decision on public spending to the producers of wealth. Taxpayers must regain their right to obtain gold in exchange for the fruits of their labour. This restoration would give the people the final say-so on governmental spending, and would enable wealth producers to control the issuance of paper money and bonds.

I do not ask you to accept this contention outright. But if you look at the political facts of life I think you will agree that this is the only genuine cure.

There is a parallel between business and politics which quickly illustrates the weakness in political control of money.

Each of you is in business to make profits. If your firm does not make profits it goes out of business. If I were to bring a product to you and say this item is splendid for your customers, but you would have to sell it without profit, or even at a loss which would put you out of business, well I would get thrown out of your office, perhaps politely, but certainly quickly.

In politics votes have a similar vital importance to an elected official. That situation is not ideal, but it exists.

Perhaps you are right now saying to yourself ‘That’s just what I have always thought. The politicians are thinking of votes when they ought to think about the future of the country. What we need is a Congress with some guts. If we elected a Congress with intestinal fortitude it would stop the spending all right’.

I went to Washington with exactly that hope and belief. But I have had to discard it as unrealistic. Why? Because an economy Congressman under our printing-press money system is in the position of a fireman running into a burning building with a hose that is not connected to the water. His courage may be commendable, but he is not hooked up right.

When the people’s right to restrain public spending by demanding gold coin was taken from them, the automatic flow of strength from the grass roots to enforce economy in Washington was disconnected.

Truman’s promises were to be expected under our paper currency system because his continuance in office depends upon pleasing a majority of pressure groups.

But it was not always this way. Before 1933 the people themselves had an effective way to demand economy. Before 1933 whenever the people became disturbed over Federal spending they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington."

Being ‘hooked up right’, as Mr Buffet described it, regulated federal power.  It meant the politician's urge to create new money was held in check by the healthy scepticism of freedom loving American savers.

Nowadays associating freedom with wealth is taboo.  The idea that someone with money has earned more practical freedom than someone without plays badly on TV.  But savers relish it anyway, and why not? After all they are the hard-workers who have resisted the urge to consume their way into debt, and they are entitled to a reward - even an intangible one like freedom.

But this freedom is under threat from a democracy of debtors, because people in debt vote for policies which destroy savings, and the politicians are happy to oblige.  That's why in just 20 years the US government has created a sovereign debt of over $8 trillion, which is $80,000 for every one of all 100 million US families.

The US has been able to reach this extraordinary level of debt because for the last 60 years the US dollar has been the reserve currency of the world.  But as with so many things in economics the privilege of reserve status is both a blessing and a curse.  For those 60 years the US has been able to put strong dollars into circulation and buy the world's goods at low prices.  The result is a world awash with dollars, waiting to be released when, for whatever reason, a different reserve begins to look more attractive.

Mr Buffet's wonderful explanation of a difficult subject is often quoted by those who seek a return to a gold standard, but they miss its point. The printing press sets a money system rolling down a one-way street to an inevitable end.  We cannot change this by protesting.  Yet for the moment we do have residual freedoms, and nothing currently prevents us owning gold in - for example - Switzerland; a deficit-free country with a profound respect for private property and sound money.

It's also a favourite holiday destination for privileged Argentinians.