REAL ESTATE NEWS (Los Angeles, CA) — Warren Buffett’s Berkshire Hathaway partner Charle Munger recently mentioned that we’re in a big bubble. How is this likely to play out when they’re printing money on the scale that modern nations are printing today? Japan the United States, Europe etc. We’re getting into new territory in terms of size. There’s never been anything quite like what the federal government and Federal Reserve are doing now. We do know from what has historically happened in other nations: If you try to print too much money, it eventually causes terrible trouble. We’re closer to terrible trouble than we’ve been in the past, but it may still be a long way off. Charlie certainly hopes so. When fed chair Volcker, after the inflation of the 1970s, took the primary rate to 20%, and the government was paying 15% on its government bonds, a horrible recession followed, lasted a long time. A lot of agony followed, and we all certainly hope that we’re not going there again. | INTERVIEW
Munger believes the conditions that allowed Volcker to do that, without interference from the politicians, were very unusual. In 2020 hindsight, he believes that it was a good thing, but he would not predict that our modern politicians will be as willing to permit a new fed chair to get that tough with the economy, and to bring on that kind of a recession. Thus, our new troubles are likely to be different from the old troubles. We may wish we had a Volker-style recession instead of what we’re going to get. The troubles that come to us could be worse than what Volker was dealing with, and harder to fix. Think of all of the latin american countries that print too much money. They end up with strongmen dictatorships. That’s what Plato said happened in the early greek city-state democracies: one person, one vote, a lot of legality, and you end up with demagogues who lather up the population with free money. Pretty soon, you don’t have your democracy any more. Munger thinks that Plato may have been right. That accurately described what happened in Greece way back then, and it’s happened again and again in latin America. We don’t want to go there. Charlie Munger does not want to go there.
The United States has done something pretty extreme, and we don’t know how bad the troubles will be whether we’re going to be like Japan or something a lot worse. What makes life interesting is that we don’t know how it’s going to work out. We do know that we’re flirting with serious trouble. Munger reminds us that some of our earlier fears were overblown. Japan is still existing as a civilized nation, in spite of unbelievable access by all former standards in terms of money printing. Think of how seductive it is: you have a bunch of interest-bearing debts, and you pay them off with checking accounts on which you’re no longer paying interest. Think of how seductive that is for a bunch of legislators. They merely get rid of the interest payments, and the money supply goes up. It seems like heaven. Of course, when things get that seductive, they’re likely to be overused.
Munger credits some of his career success with placing money into quality investments that can get through good times and bad. Investors should be equally ready for boom and bust, be ready for day and night by buying at the right price. Nothing is worth an infinite price. When investing for the long-term, it is ok to pay a fairly large price for a particularly strong investment.
What’s coming? A new bunch of emperors.
We have overall a hugely strong economy and a hugely strong technical civilization that’s not going away. Munger reminds us that our weakness today is that the U.S. now tries to solve economic inefficiencies by getting rid of the debt through an artificial non-interest bearing checking account where interest would historically need to be paid. Not only do we have a serious problem, but the solution that is the easiest for the politicians, and for the federal reserve, is just to print more money and solve the temporary problems.
That, of course, is going to have some long-term dangers. We know what happened in early 1920’s Germany when the Weimar Republic just kept printing money. The whole thing blew up, and that was a contributor to the rise of Hitler. This stuff is dangerous and serious. If you keep doubling down on that risky behavior, you’re flirting with danger. Unless there’s some discipline in the process. Japan has gotten away with some of this, according to Munger.
(Charlie is forgetting that Japan, with or without discipline, has paid a hefty price for its low interest rates: squandering its 1980s economic and technical dominance, replacing it with 30-years of relative stagnation.)
In his whole adult life, Munger has never hoarded cash waiting for better conditions. He has just invested in the best thing he could find. Today, Berkshire has quite a bit of excess cash, looking for the right deal to responsibly invest it in.
Today, people are worried about inflation and the future of the republic. Inflation is a very serious subject. Munger says, “It’s the way democracies die.” It’s a huge danger, he warns, “Once you’ve got a populous that learns it can vote itself money, if you overdo it too much, you ruin your civilization.” It’s a big long-range danger. Look at the Roman empire with an absolute ruler. They inflated the currency steadily for hundreds of years and eventually the whole roman empire collapsed. It’s the biggest long-run danger we have — next to nuclear war.
Munger thinks the safe assumption for an investor is that, over the next hundred years, the currency’s going to zero. That’s his working hypothesis. This kind of very dangerous environment brought in Hitler. It was the combination of the Weimar inflation, where they utterly destroyed the savings of the middle class in Germany, followed by the great depression. It was a one-two punch, then Hitler came in — a dictator hell-bent for world war. The lesson: Germany was a very advanced and civilized nation, yet Germany voted Hitler in after they somehow let their nation deteriorate too much. Money printing and reckless expenditures leads to depression, world war and tens of millions dead.
In today’s age of Keynes (socialism) we’re going to get big government reaction to economic crises, health crises, political crises, any crisis. The reaction this time was bigger than it’s ever been before in the history of the united states. they just threw money at the problem. Munger goes on to say that people are getting more spoiled. They demand more and more for less and less. He says that the world is driven by envy. Everybody is five times better off than they used to be, but they take it for granted. All they think about is somebody else has having more now. He reminds us that the bible warns us not to covet our neighbors ass.
An example of the damage of today’s culture of envy: During the great depression of 1929, it was safe to walk in the poorest neighborhoods. Today is shockingly different. Walk in Los Angeles while wearing a Rolex, and get mugged. Pretentious expenditures lead to dissatisfaction. Investing in quality stocks and apartment houses provide enough diversification. Four good assets is plenty, according to Charlie.
Good investments? it’s going to be way harder for the group graduating from college now for them to get rich and stay rich. It’s going to be way harder for them than it was for Munger’s generation. Think about what it costs to own a house in a desirable neighborhood in a city like Los Angeles. Munger believes that we’ll probably end up with higher income taxes too. He says that the investment world is plenty hard.
Inflation’s effects on the future is going to give more happiness to those with more modest ambitions in terms of what they choose to deal with. Skills will come into play. To everyone who finds the current investment climate hard, difficult and somewhat confusing, Charlie says, “Welcome to adult life.”
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