Warren Buffet: Monetarist, or just plain Hypocrite?

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Warren Buffet: Monetarist, or just plain Hypocrite?

I cannot believe Buffet's duplicity on display in this article.  Or is it just a careful cover-up?  

How can a guy this smart possibly believe that the Fed can perfectly time when to inject and then withdraw the money flow?  How can a guy as well-read as him ignore the unilateral historic failure of fiat money, and pretend that although 3,000 paper currencies have failed, that somehow we're going to get it right this time?  

If Mr. Buffet was solely critiquing what the Fed has done and is doing, and if Mr. Buffet had not been the #1 cheerleader behind Paulson, Bush, Geitner, Obama, and Bernanke, then I could have a reason to believe his advice was sincere.  But for him to have endorsed the largest looting operation in the history of the world, which has resulted in the rescuing of the biggest clan of charlatans from a financial disaster they not only brought on but sold to the rest of us, and then come out and give us grandfatherly advice against printing too much money, is the height of hypocrisy, condesencion, and outright nerve.

I used to be a big Buffet fan.  I am no longer.


The Greenback Effect

Published: August 18, 2009

Omaha

IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Same here.  I used to think he was one of the few honest people in high finance.  Then, with some recent shenanigans, where he made pronouncements as to following one course of action publicly and surreptitiously did the opposite, I realized that he was just like all the rest but slicker.  He gave the appearance of being a benevolent rich old uncle type but you don't become that wealthy without being one step beyond shrewd and cunning, if you know what I mean.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Peter Schiff 8-19-09 talks about buffet

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Buffett is engaging in the fallacy that one can be 'a little bit pregnant.' He's suggesting that after an orgy of irresponsible Federal Reserve printing  and Treasury looting, Congress can suddenly change its spots and become fiscally prudent.

He's smart enough to know that's flat wrong. Either you punish counterfeiting (including Federal Reserve counterfeiting) with prison sentences, or you accept  that the 'elastic currency' flimflam authorized in the Federal Reserve Act will continue to its inexorable conclusion of exponential debt expansion.

Buffett is probably just indulging in a little hortatory image burnishing, as he rounds the bases one last time before ending his career.  He can't be serious when he says,

Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

One thing Buffett does understand is accounting. Anyone who reads the annual Financial Report of the United States, and possesses high school math skills, will understand that keeping 'growth in obligations in line with growth in resources' is now mathematically impossible.

Fortunately, the Buffett family owns enough Federal Reserve Notes that national bankruptcy shouldn't pose much of a risk to their lifestyle, even if Congress does trash the value of their dollars. Warren warned them about this outcome in the New York Times ... but they wouldn't listen.

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Oh, Hypocrite . . . Big time . . .

Same here . . . When I heard him backing the bailouts, and calling for folks to invest heavily in the markets, because stocks were such a "bargain", that was the last straw for me.  I sold my BRK.B stocks, which were the core of my portfolio, even though they had held up well in the downturn, and even though they were apparently positioned well to pick AIG's bones (That turned out to be a good move . . .  the stock proceeded to lose nearly half its value, from there). . . I just plain didn't like this guy's ethics.  I already had lingering doubts about the prescient timing of his "divesting" to the Bill and Melinda Gates foundation, as well as his apparent ethics in the reinsurance business . . . Remember that reinsurance is the backbone of Berkshire Hathaway, and its money is made on "float", that is, the period of time that money (from premiums) is held before it has to be paid out.  It is this profitting from delaying claims payment (to people who desperately need the money) that provides the cash flow that Buffett uses to buy other businesses.  One such category of claims was related to asbestos . . . I remember reading one of his famed annual reports, in which Buffet was crowing about how long his minions had managed to delay payment on those claims through litigation . . . meanwhile, using the funds to purchase a variety of American companies . . . Every once in a while these predators forget that their victims may be listening, and just may understand the implications of their business plan.  The geeky look, rumpled suits, and folksy chatter don't fool me anymore  . . . Buffet's right there in the thick of it . . .

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How Does Inflation Specifically Benefit TPTB?

Ok Farmer Brown (or anyone), this article brings up something that has been nagging me for sometime. Try as I might, I can't wrap my feeble brain around it. It has to do with this famous quote of  Keynes (cited in the above article)

In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

 If a government's (or TPTB/Central Bank) wealth is measured by the same currency that it is inflating, then how does that process transfer any wealth from the citizens? Doesn't the government's dollar devalue at the same ratio as everyone else's dollar? If the major symptom of inflation is higher prices, doesn't the higher prices affect "Joe Six Pack's" and "Mr. Central Banker's" purchasing power to proportionally equal degrees? We are only considering the process of currency inflation here and no other factor. I understand how inflation would aid a government's ability to pay debt, but I consider that a separate matter.

Now, if the governments/central banker's wealth was measured by resources and tangibles like gold, I can see how it could maintain purchasing power while the citizens lost purchasing power over time. But even if that was the case, the banker's gold would not gain purchasing power at the direct expense of the people, it would just hold its purchasing power.

I guess I don't have a one in a million mind, because I can't diagnose how the inflation process confiscates purchasing power from the people for the benefit of the TPTB. Can anyone help me understand this? Thanks in advanced.

 

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Re: How Does Inflation Specifically Benefit TPTB?

John Meynard Kenyes was wrong about blaming the government for our financial problems.  I believe we have the greatest form of governement ever invented it's just that bankers hi-jacked it, and it's up to us to take away the power over the control and issuance of the nations money supply as credit and start having the government spend money into circulation instead of having the banks create 100% of our money suppy and have 100% of our money created as an interest bearing loan.

Don't feel bad if you don't have a 1 in a million mind.  Really Kenyes should have said a one in a 20 million mind, because that is probably statiscially more accurate.  There are a few people out there who have figured this stuff out on their own though.  I know that I am not a one in a million mind myself, but through a lot of study of how this money system actually works I now understand that the problem isn't what we use for money, the problem is that 100% of our money comes into exisistance as an interest bearing loan.  It wouldn't matter what we use for money, if it is all loaned to us at interest, the end result is the same.

Maybe this next two part video will help explain what and why we have to have a constant inflation of the money supply or this system grinds to a a halt.

Part 1

part 2

After you finish watching those videos can you see why each generation has to go constantly deeper and deeper into debt in order for this system to continue?

Isn't it obvious that it is impossible to borrow ourselves out of debt?

Then how about we collectively get together and demand laws like 'The Minnesota Transporation Act' get passed to put debt free, wealth money put into circulation?

 

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Jeff, as you said it benefits government because it enables them to finance debt.

It benefits TPTB in a couple key ways:

1 - they get the money 1st, at time 0, before inflation, before it's run through the banking velocity machine...it's called high-power money or fast money.  so they get purchasing power when prices are relatively low.  then their asset prices are inflated as they run the machine.  they cash out and reverse positions when they turn off the machine.

2 - more importantly, inflation is the mechanism that makes the machine work...so they need inflation in order to run the game long enough to massively benefit from the privilege of claiming everybody's productivity as their own asset.  it's how TPTB build the empire, work the pyramid game.  it's the way they get to the top of a very tall pyramid...the pyramid has to be built.  then once it's high enough (see the wealth gap thread) they position themselves for deflation.  

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Strabes,

Your response makes sense to me, but it seems more trading-oriented than economic-oriented.  Keynes' quote is in the macro-economic or systemic ballpark. I understand the market dynamics and strategies that the big boys (smart money) use to manipulate markets to their advantage, but I believe Keynes is referring to a much higher level game than just market strategy. 

I do like your thought on higher-power money, but since the creation of credit money is an ongoing process, I don't see it yielding more than a skim of purchasing power from the economy. I'm sure this skim on the economy is significant, but I don't think it is of the magnitude that Keynes is alluding to in his quote.

Thomas,

So this is what I believe you are saying:

The banks create credit (debt-derived) money. At any particular point in this process, their is never enough money in the system to cover the interest, so more money must be loaned into existence to cover the interest inherit to pre-existing currency. And of course,  this cycle must repeat to sustain itself, and thus inflation of the currency is the synergistic consequence of this process. 

Thus, the true cause of inflation is the interest that is implicit in the money creation process. Therefore, the interest is the vehicle that transfers the wealth of the public to the banks. But if we take this one more step, the interest is also correlated to the gradual decline in purchasing power of the currency.

So the more money that the banking system creates, the more money they create for themselves, but said money is worth less and less in purchasing power as the process unfolds. So at any point in this process, can we conclude that the banks have transfered purchasing power from the public? I'm sure the answer is yes, given human nature alone, but I don't yet understand the scam that is at the heart of our monetary system. Obviously I have made many incorrect assumptions in my analysis, but I'm going to keep thinking about this.

Thank you guys so much for the input. Its amazing how much it helps to bounce ideas around. Now I'm off to watch your videos Thomas.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

So this is what I believe you are saying:

The banks create credit (debt-derived) money. At any particular point in this process, their is never enough money in the system to cover the interest, so more money must be loaned into existence to cover the interest inherit to pre-existing currency. And of course,  this cycle must repeat to sustain itself, and thus inflation of the currency is the synergistic consequence of this process. 

Thus, the true cause of inflation is the interest that is implicit in the money creation process. Therefore, the interest is the vehicle that transfers the wealth of the public to the banks. But if we take this one more step, the interest is also correlated to the gradual decline in purchasing power of the currency.

So the more money that the banking system creates, the more money they create for themselves, but said money is worth less and less in purchasing power as the process unfolds. So at any point in this process, can we conclude that the banks have transfered purchasing power from the public? I'm sure the answer is yes, given human nature alone, but I don't yet understand the scam that is at the heart of our monetary system. Obviously I have made many incorrect assumptions in my analysis, but I'm going to keep thinking about this.

Your analysis is very good I would just like to add a few things.

1.  So at any point in this process, can we conclude that the banks have transfered purchasing power from the public?  I'm really going to have to think about that statement.  Anyone that has done any research or studied our Federal Reserve Money system knows that it was designed by bankers to work for their benifit.  In short I believe that our currency derieves its purchasing power because in order for any of us to have this 'money' we all have to sign a court enforcealbe promissory note, combined with the very slick mental deception that the banks are actually loaning you money.  In short I'm not sure how to answer this question yet.  I really have to do some thinking on this one.

2.  The scam at the heart of what is wrong with our monetary system is that our monetary system has been debached.  At one point in time the more money we had the wealthier we were, now the more money we have, the more debt we have.  The only way money can be debached (made corrupt or immoral) is to switch it from an evidence of wealth to an evidence of indebtiness.  Sadly very few people have made this connection.  Most people believes that it matters what money is (gold, silver, paper, beaver pelts ect) and not what money does (represents wealth, or represents debt).

3.  What most people don't realize is that an increase in money (we have no money in our system, only credit and there is a difference, but we use credit as money) does not create an increase in prices (price inflation).  Only an increase in interest bearing debt can cause price inflation (or if we purchase items at auction, but that rarely happens in America anymore) because of an increase in interest and taxes.

4. The only way out of our this financial disaster is that we are going to have to put money into circulation as final payment, debt free.  There is no other way to get our of debt that to put money into circulation that is free of debt.  There is legislation pending in Minnesota right now to do this, we just need some people to get behind it and start making phone calls demanding that they pass The Minnesota Transportation Act.

P.S.  That's one hell of a posting you did.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?
Quote:

 but it seems more trading-oriented than economic-oriented

Jeff, my #1 was trading.  #2 goes to the strategic foundation of the economic model they built.  on the back of the dollar is a pyramid.  there's a reason.  it's a powerful metaphor and must be understood.  for 100 years the dollar has been the world's pyramid builder (I'm not making up some mysterious illuminati stuff...I'm describing the system if one understands the hierarchy of the dollar system, i.e. the economics of it).  instead of using whips and chains as the Egyptian pharaohs did to put the masses to work building their pyramids, our modern elite used the dollar to put people to work to build their pyramid.  it is far more massive than the Egyptian pyramids, but it is an unseen pyramid (to Keynes point that nobody sees it). we're all fooled into thinking we're getting more wealthy.  no.  on a nominal basis we're fooled into thinking we are (inflation keeps the masses fooled) but we're really becoming poorer on a relative basis as the top of the pyramid becomes far more wealthy/powerful.  moreover since inflation comes from the national govt putting everyone into further debt, nobody is forced to face that debt servitude on a personal level (the debt bondage goes unnoticed...again we're fooled). rather than being more wealthy we're just caught in a hamster-wheel system where most of our time awake in this world is spent as wage servants, consumption addicts, tax servants, and interest paying servants.  most westerners are probably somewhere in the lower middle of the pyramid.  the 3rd world, sweatshops, etc are at the bottom. the top of the pyramid has taken the gold, the real assets, etc; they play the currency and debt markets to avoid the $ inflation; they lever up during the inflation cycle as leverage protects against tax and principle inflation; and they just hand out cheap electronic digits and a few FRNs in return.    

once an economy is developed to the point where production growth levels out, then inflation is the only mechanism left by which the pyramid can keep getting bigger.  it's the key to the whole game.

inflation lasted so long that the pyramid grew big enough to suck in most of the globe, i.e. the financiers at the top now eat from the sweat of billions of people's brows...such a system of harnessing everyone's labor to benefit a few at the top has never been so successful.  that's how inflation benefits the TPTB strategically.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?
JAG wrote:

  If a government's (or TPTB/Central Bank) wealth is measured by the same currency that it is inflating, then how does that process transfer any wealth from the citizens?

Jeff,

Like Strabes said, they get to spend the money first.  Inflation does not happen all at once or work to everyone's detriment equally.  It actually benefits those who control the counterfeiting process.  If you had a $100-printing machine in your basement and printed up a cool $1 million, you could go out and spend that and get every drop of value inherent in a $1 million.  In so doing, you will have transferred wealth from all the people who own "real, legitimate" (very hard to type those words) dollars to yourself by absorbing the goods and services your dollars have illigitimately purchased.  Factor that concept upwards several 1,000 times and you will accomplish what the government does everyday.  After some time however, all those new dollars swish and swirl around the economy, and soon there are many more dollars chasing the same goods and services as before.  You were not affected because you spent the fake dollars first.  And even if you had any savings (which our government does not), who cares?  Just print up some more.  It's all good - you have a printing press - worry about devaluing your dollars - you have a pritning press!  There is no need to worry!

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

I'll attempt to answer 'JAG's conundrum'  (Don't the government's dollars devalue at the same rate as everyone else's dollars?). The answer to the conundrum is, yes, the government's dollars DO devalue at the same rate as everyone else's. However, the government still obtains direct benefit from the inflationary process in two specific ways:

1. As strabes stated, the government gets to spend newly-created dollars first. An example: in expanding its balance sheet by a trillion dollars, the Fed wrote checks on thin air, creating a trillion dollars worth of purchasing power from nothing. The rest of us received no 'free' purchasing power from that operation. In fact, in a couple of years, the dollars we hold will be devalued in purchasing power, thanks to the Fed having created more of them. But the Fed captured the full trillion-dollar benefit, before the inflationary consequences followed.

2. As the largest debtor in the known universe, the government can reduce the real value of its debt through inflation. Example: say the government owes ten trillion dollars. The one trillion dollars of new Fed-created purchasing power in the example above eventually causes a 10 percent inflation. Now in real terms, after inflation adjustment, the government's outstanding debt has been reduced to just above nine trillion dollars. Another way to see this is that the government's income went up 10 percent owing to the inflation, but its outstanding debt total didn't change -- so servicing it or retiring it takes less of the government's increased income than before.

Of course, private parties may benefit from inflation too. The general strategy in an inflation is to own assets which rise in value with inflation, and to finance them with fixed-rate debt which is gradually devalued by inflation. Leveraged real estate, for example.

Nevertheless, being able to write checks on thin air is an incredible privilege, available only to sovereigns, fraudsters and counterfeiters (I realize I'm being redundant). Like crack hos, governments who get accustomed to writing thin-air checks find the rush so breathtaking that they just can't stop. Soon they end up as tattered, gimlet-eyed wrecks, writhing in the gutter.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

p.s. Farmer Brown, we're on the same page, but you got there three minutes before I did. Touche!

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Re: Warren Buffet: ...Here let me reinterpret that....

If Warren wanted to get that published here, it would have had to pass through our crack editorial team, and they are known to be sticklers for accuracy and slavish to "reality" and "data".

Below, they take a stab at it....


The Greenback Effect Published: August 18, 2009

Omaha

IN nature, every action has consequences, a phenomenon called the butterfly effect [Ed.  Struck.  The "butterfly effect" is a phrase that captures the essence of 'sensitive dependence on initial conditions' which is a component of chaos theory, not "natures consequences" many of which are linear and proportional].

These Nature's consequences, moreover, are not necessarily proportional pitiless. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society which will prove to be immune from the benefits of goosing the stock markets with properly timed S&P futures injections from the Treasury & Fed. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, The United States is spewing a potentially damaging substance into our economy — greenback emissions. [Ed.  Good one!]

To be sure, we’ve been doing this for a reason I resoundingly applaud because our stock holdings, especially those in the poorly managed insurance and banking firms we hold, were bailed out as a result.

Last fall, our financial system stood on the brink of a collapse that threatened a depression or maybe not, and we'll never know since there's no way to tell. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need. [Ed. Struck.  Need data to back up these beliefs]

They made mistakes, Mistakes were made, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them the Treasury Secretary suffered as many conflicts of interest as he did?  A meltdown, though, was avoided delayed, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery is now in the ICU hooked up to a heart-lung machine requiring constant life-giving dollar pumping to remain "stable." 

But, as I just said, enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product.

This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record, or four times if one backs out the recent GDP statistical forgery offered by 'imputations' and 'hedonics'. In dollars, that equates to a staggering $1.8 trillion on a cash basis, and more than $5 trillion on a liability basis.

Fiscally, we are in uncharted territory utterly insolvent since there are no examples of government's racking up liabilities and debts exceeding 5 times current GDP that have ever done anything but completely destroy the currency of their nation.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent, assuming you believe GDP as it is reported and only look at debt but perversely exclude all liabilities and obligations. .

Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, forcibly borrowing from our own future citizens or, through a roundabout process, printing money as the means to effectively tax everyone through the process of inflation.

Let’s look at the prospects for each individually — and in combination.

[Ed.  We had to stop here and revert the original back to Mr. Buffett.  The editorial effort was too high and so we respectfully requested a re-write with an eye towards a better grounding in economic reality and history.]

 

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Thanks everyone for the input on my conundrum. But I still have a few questions, sorry.

FB, Strabes, and Machinehead,

I like your counterfeiting analogy, but isn't it true that the banks do not directly purchase anything with the money that they create? They lend that money to a citizen and/or business and the citizen/business purchases something with that money. The banks are paid back over time, therefore they are not first in-line to take advantage of the purchasing power that they created.

In fact, by the time the bank is paid back, the currency that they are paid with has been fully devalued by the inflationary forces that were set in motion by the original transaction. Granted, at the end of this cycle, the banks have received purchasing power that they did not earn (that they printed into existence), but do they purchase anything with the money that was repaid to them? No, they lend it out again and thus the cycle repeats.

So, a bank's only benefit from the counterfeiting process is the interest that is paid on the money that they loan into existence. The interest is in-effect a skim off the nation's purchasing power, but the banks are providing a service for the interest that they receive.

Additionally, If the loan is defaulted on, the bank takes possession of the asset purchased with their loan, but do they directly profit from the subsequent sale of this asset, or do the proceeds just go to establishing another loan? 

As far as the inflation process allowing governments to pay back their debt at a reduced real value, I have the following observation/questions:

Isn't the money that is taken in by the government, via taxes, etc, also subject to a corresponding reduction in real value? So the net effect is, the government spends less purchasing power on paying off their debts, but they also receive less purchasing power via taxes and via the public purchase of their debt. In other words, the money that is lent or paid to the government is devalued by inflation to the same extent that the money paid by the government is.

How does this invoke a net transfer of purchasing power from the people to the government?  Doesn't the degradation of purchasing power affect all participants in the economy equally, including the government? 

Sorry to be so long winded on this, and I truly appreciate your input on this conundrum of mine. I'm sure I'm fooling myself, but I think I have learned a lot from this conversational exercise.

 

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Chris edited Buffet:

"These Nature's consequences, moreover, are not necessarily proportional pitiless. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society which will prove to be immune from the benefits of goosing the stock markets with properly timed S&P futures injections from the Treasury & Fed. Realizing this, the world properly worries about greenhouse emissions."

+1 to all of the above and everything else you wrote!

I wonder how the Bernanke gang plans to deal with any "success" they might have if they manage to turn on the S&P ATM...

Maybe the truth is, they really aren't concerned with the inevitable hyperinflation & continual de-industrialization that would necessarily follow such a "success," as they aren't planning on being here...

It all makes one wonder: What the hell are they thinking?

 

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

I actually noticed Buffett's incorrect usage of the Butterfly Effect the first time I read this memo...He seems to be rather flippant lately: he strongly supports Obama, but then opposes cap and trade, one of Obama's major thrusts. He strongly supports stimulation, but now warns of inflation. I also find it interesting that he was repeatedly mentioned by Obama as a possible economic advisor of sorts. I can't help but speculate if some of the statements made by Buffett over the past year weren't heavily influence by politics.

Although his statements really haven't impressed me for a while now, he is something like an old rock band (think Rolling Stones) that just keeps coming back for another tour and living off of their legacy rather than really creating any new value. Regardless of how ridiculous his statements may be, he's still Buffett and will likely retain his clout unitl the day he dies.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

The process you are seeking to understand has a name.

It's called "seignorage"

Here's a link to the Wikipedia page on seignorage.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

 

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Isn't it true that the banks do not directly purchase anything with the money that they create? - JAG

This is true for commercial banks. But it's not true for the Federal Reserve. When the Federal Reserve wrote a trillion dollars of checks on thin air, it actually purchased a trillion dollars worth of securities, which are now carried on the Fed's balance sheet. If the Federal Reserve didn't exist and these securities had been bought with a Congressional appropriation, this year's estimated deficit of $1.8 trillion would have been $2.8 trillion instead. So the Fed really did receive a $1.0 trillion benefit from its thin-air currency creation. My previous example pertained to the Fed, not to commercial banks.

In regard to inflation, since the bulk of the government's taxation is percentage-based, inflation has a roughly neutral fiscal effect. If inflation rises 10 percent, government's income will go up 10 percent, and so will its expenses. However, the government's accumulated debt will be devalued by 10 percent in real terms. Therefore, as a large net debtor, government still has a tremendous incentive to inflate.

Only a tiny portion of the government's debt consists of inflation-indexed TIPS. The balance is denominated in fixed dollar amounts. When that debt can be paid off in devalued dollars, the government benefits to the extent of the devaluation. So do other debtors. Inflation rewards debtors and punishes creditors, such as bondholders. For 40 years, from the mid-1940s to the mid-1980s, bonds suffered a long bear market owing to inflation. Bondholders barely eked out a positive return. But Usgov worked off much of its WW II debt, simply by paying it off in devalued dollars.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Jag:

 

 but isn't it true that the banks do not directly purchase anything with the money that they create?

They purchase a mortgage on your property.

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

JAG, also keep in mind that banks are just the corporate shell used by the controllers to do the value extraction (to follow the money we always need to identify the actual people pocketing the money, not the impersonal corporate identity).  So you're mostly right commercial banks don't purchase anything with the money except other financial assets used to keep the machine growing.  But the people that control the banks benefit greatly from their senior equity stake (and the top operating officers get a nice paycheck as well if they accomplish the controllers' goals).  That's one of the beautiful aspects of owning/controlling a bank.  They can send an impersonal shell called JPM Chase into Argentina as a way of conquering new territory, while the owners/controllers never get noticed since they hide behind the shell as they extract the real wealth of the country in return for handing out cheap credit.  Once the people revolt, the impersonal corporate logo gets blamed while the controllers have quietly bought more estates, gold mines, diamond mines, petroleum producers, wineries around the world.  

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

Thanks everyone for your inputs. You each have made some good points. Unfortunately I am on a jobsite right now using an iPhone to communicate with you guys, so the next round of my education will have to wait until I get back to the office. Thanks again...Jeff

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

As some of the least informed, but most prepared, members of our society would say:

"Figuring out this stuff, is like putting your hand in an un-flushed toilet....."

I don't feel our conversation reached any one and million conclusions, but I won't waste anyone's time anymore on this.

Thanks again for the input....Jeff

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

It seems like Nate agrees with you guys:

So why was our money system “designed” to be inherently “unstable?”

Here’s an observation that may help you answer the “why…” Those who are closest to inflation gain, while those being whipped at the opposite end of inflation lose.

 

I’d call those at the end of the inflation “whipping boys,” they are also known as the “sheeple.” Or, they are also known as you and me!

I still have no clue how inflation enriches the banksters, but I'm willing to concede that it does, because it probably wouldn't be the foundation of our monetary system if it didn't.

Jeff

Captain Sheeple News

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

JAG,

The system is a compromise to share the ultimate power between the Fed and the government. 

Inflation benefits government because it allows for the confiscation of wealth through the mechanism explained above by myself and machinehead.  This allows for the possibility of paying for programs they could not deny their constituents with money they did not have the spine to explain to them that the programs would cost.  It funds super-duper-I'll-vote-for-you-promises that get politicians re-elected year after year without the annoying and unpopular tax increases that "reality" might otherwise impose.  In short, it fuels a fairytale fountain of lotus scented wine that both the politician and the voter drink from, both too drunk from the narcotic of instant gratification provided by the freshly printed notes to observe that they are simultaneously pissing all their savings away while a giant steel and inpenetrable yoke is locked around their collective futures..

That's what the government gets out of the license they have provided the banks.

What the banking system gets out of the deal is the privilege to have a monopoly on money, and all the interest that can be derived from it.  Sure, they may not like it when their brother and partner in crime gets carried away and possibly endangers the value of all that debt they have out there, but that's part of the deal.  Their partner in crime did grant them the exclusive license to do what they do, so when they get a little carried away with their promises, deficits, and insolvencies, the banking cartel sighs, pulls some levers and punches some keys and pours some more narcotic into the fountain so that its reckless brother can continue embibing in the reckless orgy that is what gives his life purpose, and wins re-elections.

And so it goes forever forth.  One side provides the license, the other the drug that keeps the licensure in power.

 

 

edited to delete stray line

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Re: Warren Buffet: Monetarist, or just plain Hypocrite?

JAG, we know from the CC that banks depend on exponential money growth for the system to keep running.  Should be clear then how inflation benefits them.  It's the essential ingredient to presiding over their territory's money (at least it is after growth via production has been curtailed).  

Farmer, good commentary...i especially like govt as "orgy."  :)   But to be clear about what the Fed/banks are, I think on the contrary they don't sigh as if their buds in government are bad when they grow debt.  DC debt is a result of the Fed/banking system.  A bunch of idiot politicians would not have been able to get us so severely in debt if the bankers didn't want it.  The system is designed so the more in debt DC is (to the Fed...they aren't equal partners...DC is a client of the banks),the more "reserves" the banking system has, so the more "money" or poker chips the banks can throw on the table for us to play with.  The banks NEED the govt doing that...amping up the speed of the hamster wheel the bankers built to ensure we're running harder to pay more interest and taxes.  At least they need it in the US since production growth petered out...they won't need it in China as they milk it for the next several years since production should be the fuel for growth there for a while.

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The Only Question That Matters

Ok Guys,

So lets get to the most important question, and the real reason I initiated the discussion on Keynes's famous quote.

What do we, as individuals, do to nullify the advantage that our monetary system has over us?

Isn't that question the real reason that we all participate in this site?

Hypothetically speaking, lets assume that we can do nothing to change our financial system, our government, or the opinion of the populace, as we attempt to answer this question.

IMO, the only two answers to this question are::

  • We beat them at their own game.
  • We don't play their game.

Since there is no reliable store of wealth/investment that is immune to a loss of purchasing power, your really going to have to be one step ahead of nearly everyone with your investments to beat the systemic inflation.

Not playing their game means banishing money from your life. How many of us could pull that one off, and still enjoy our lives? I personally have never received a loan in my life and have never been in debt to anyone.  But I still have to pay property taxes each year. So in order to keep what I have built of my life, I still need to make money. So I have to play the game.

Any other options out their in the forum brain trust?

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Re: The Only Question That Matters

JAG,

IMO if we cannot

Quote:

change our financial system, our government, or the opinion of the populace, as we attempt to answer this question.

, then the only option is the first one you posited (try to stay one step ahead of the game).  

Option 2 is impossible unless you take up residence in a unabomber hut in the boonies.  

I think the solution is we do need to change the opinion of our populace, and then change the financial system and the government or else this will never end.  What I worry about is the system collapses and we replace it with something even worse.

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Re: The Only Question That Matters

The story of someone who choose to stop playing their game.

"When I lived with money, I was always lacking," he writes. "Money represents lack. Money represents things in the past (debt) and things in the future (credit), but money never represents what is present." 

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