Saturday, November 14, 2009

Warren Buffett on Charlie Rose

Also, be sure to click on the 'Web Exclusive' tab to see part of the interview that didn't air on TV.

Excerpt from the transcript:

CHARLIE ROSE: You have also said and been very clear that you think in this conversation and every other one, you know, that we had to pour a lot of money at a crisis, and we may very well have presented ourselves with a problem that is as difficult as the crisis.

WARREN BUFFETT: Well, when you -- when you use old medicines in unprecedented dosages, and even invent some new medicines as we had to do last fall -- you know, there are side effects and after-effects. And probably they’re somewhat proportional in certain ways to the extreme nature of the dosages. So, you know, we cannot keep running fiscal deficits like we are currently without having a lot of consequences over time. And ...

CHARLIE ROSE: $1.4 trillion for 2009.

WARREN BUFFETT: Yeah, a lot -- you know, that’s just, you know, even for a guy like me, I mean ...

CHARLIE ROSE: Those are real numbers.

WARREN BUFFETT: Trillion gets my attention. So, you know, that has consequences. And we are not saving $1.4 trillion to finance that deficit. And we faced huge deficits in World War II. I mean, relative to GDP then, to fight a war, and there were inflationary consequences after, even a little bit during the war.

CHARLIE ROSE: So inflation will be inevitable because of the amount of money we ...


WARREN BUFFETT: And then the question is whether -- and basically, it’s Congress. I mean in the end, Congress is the one that determines the value of the dollar over time. They -- if they follow policies that require us printing too much of it, monetizing debt and all of that sort of thing, dollars -- dollars will become worth a lot less.

CHARLIE ROSE: So Congress has to do what?

WARREN BUFFETT: They -- they have to, once the economy is rolling again, they’ve got to -- they’ve got to apply some, you know, they’ve got to raise taxes now that income will go up as the recession ends anyway, but they’re going to have to -- they’re going to have to close the gap between expenditures.

CHARLIE ROSE: They’ve got to find more revenues.

WARREN BUFFETT: They’ve got to ...

CHARLIE ROSE: The expenditures is a harder thing to do than the -- finding the revenues. Isn’t it?


CHARLIE ROSE: I mean -- go ahead, tell me. Which is easier, cutting expenditures or raising the revenues?

WARREN BUFFETT: They have got to do one of the two, because the gap between the two, you know, is as wide as the percentage of GDP -- is wider as a percentage of GDP than we’ve ever seen except in wartime.

CHARLIE ROSE: It’s now what, ten percent?

WARREN BUFFETT: Yes. That’s exactly. Just a touch over ten percent is the gap. And that’s huge.

CHARLIE ROSE: And what’s acceptable? Six?


CHARLIE ROSE: It was six during Reagan. It was six ...

WARREN BUFFETT: We can work -- if we have a gap of about 2, 2.5 percent and we have sort of normal growth, then debt as a percentage of GDP doesn’t grow. So, the country gets more valuable over time and we have more productive capacity, and all. So we can handle more debt, but it should not be -- it should be proportional to, in a sense, the wealth and earnings of the country. And -- and we can take a couple of percent gap over time, and have that debt not grow proportionally.


WARREN BUFFETT: It’s about -- the net outstanding is about 55 percent of GDP now. There’s nothing wrong with that. But you don’t want to just keep climbing. And at a point it gets out of control and interest on debt compounds and all of that sort of thing. But of course, in good years, if you’re going to average 2 percent, you’d better not have 2 percent be the base, because you’ll get into years like this with ten percent, and it will pull the average up a lot.

CHARLIE ROSE: This question is asked frequently. Will at some point the deficit and the debt and the decline of the dollar get to a point that people who hold our debt will no longer want to buy and then we’re in a crisis?

WARREN BUFFETT: Well, the rest of the world doesn’t have much choice, in a sense. I mean, if we -- if our current account surplus -- deficit, is $400 billion, we’re handing 400 billion to the rest of the world. They’ve got to buy something with it, and one way or another they have to buy something in dollars. I mean, if they get those dollars and they buy government bonds of the United States and they decide to sell them to buy stocks, you know, they still get dollars when they sell the government bonds. They can -- they can choose among assets. They can’t really choose not to invest in the United States.

CHARLIE ROSE: But they can choose as to where else they go for new investments, can they not?

WARREN BUFFETT: Well, they -- in effect, if we’re running a $400 billion deficit figure, the rest of the world is getting $400 billion worth of I.O.U.’s of one sort or another from the United States.

CHARLIE ROSE: Right. Right.

WARREN BUFFETT: Now, if they invest that in France -- because some say the Chinese buy stuff from France -- now France has got the dollars. The only way you can bring down that is to actually get rid of the current account deficit over time. And -- but in any event ...

CHARLIE ROSE: And that’s having to do with the costs and savings, the consumption savings rate.

WARREN BUFFETT: But if you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.’s in effect to the rest of the world, that leaves another trillion. And, you know, the domestic savers are not going to come up with a trillion. I mean, so these numbers are unsustainable over time, what we’re doing. It is true, though, that if you keep flooding the world with your debt and people see your fiscal policies are sort of out of control, they’re going to get less and less and less enthused about your debt, and then one of two things happen. Either you keep paying more and more to roll over that debt or you start monetizing it like crazy. And I mean, the Federal Reserve can buy the debt and issue -- issue currency for it, but then the currency gets worth less.

CHARLIE ROSE: But is what you just described the reality we’re facing if we don’t do something dramatic soon?

WARREN BUFFETT: Fairly soon. And we still want the economy to come back. I mean, we want to put out the fire. You know, but then make sure ...

CHARLIE ROSE: You worry about that later after we put out that fire.

WARREN BUFFETT: Then we don’t -- (inaudible) just squirting water on those buildings. We have to know when the fire is out.

CHARLIE ROSE: Yeah, but how do we know that? That’s my question.

WARREN BUFFETT: Oh, well, well, we will know -- unemployment will top out late. But we’ll know when the economy is really coming back.

CHARLIE ROSE: What will be the indication of that for us?

WARREN BUFFETT: Well, it will be -- it will be retail sales. It will be automobile sales. It will be when home construction starts coming back. It’ll be -- there’ll be plenty of economic signs -- they may be a little late in getting recognized. There’s you know, the depth (ph) comes a little late.

CHARLIE ROSE: Right. Right.

WARREN BUFFETT: But we’ll know. We’ll know. We won’t know -- we won’t know when the turn happens, but three or four months later, we will know it’s happened.

CHARLIE ROSE: And it’s inevitable that’s going to happen in the next year or two or later?

WARREN BUFFETT: Well, I like two better than one. But when you say inevitable, that doesn’t mean it can’t happen earlier.

CHARLIE ROSE: But I mean -- what would you worry about that might -- that we might not come back the way we ought to, that somehow there have been repercussions from this that will have lasting impact?

WARREN BUFFETT: Well, there will be some lasting impacts of certain types, but in terms of coming out of it, I don’t worry. If you had some big exogenous event -- if you had a major-- either by a country or by terrorists -- sort of a 9/11 squared or something ...

CHARLIE ROSE: Right. Right.

WARREN BUFFETT: ... a huge anthrax attack or something like that, you know.

CHARLIE ROSE: Or oil went to $250 a barrel or something like that.

WARREN BUFFETT: If oil rose to $250 a barrel, there can be certain exogenous effects that could ...

CHARLIE ROSE: So, that kind of thing would worry you the most that’s likely to happen. Otherwise ...

WARREN BUFFETT: I mean, for some reason or another, 5 million barrels a day of oil out of the 85 million barrels, you know, got shut off, and more or less looked like permanently at the time, you know, there would be a lot of disruption in this world.