I.O.U.S.A. (48 page)

years from now that they were worth less, per unit, than they are today. So any country that piles up external debt will have a great temptation to infl ate over time, and that means that our currency, relative to other major currencies, is likely to depreciate over time.

Q:
What is a gold standard, and is the gold standard a viable
option these days?

Warren Buffett:
I do not think that the gold standard is a viable option, and I don ’ t think that gold has magic attached to it.

It is true that when you turn paper money in, what you get in exchange is more paper money. If you have a gold standard you can get some gold, but you can ’ t do much with gold, either. Over time, people have dug up gold from the ground in far, remote areas and then they ’ ve shipped it thousands and thousands of miles and they ’ ve put it in the ground over here and hired guards to stand over it. So the real utility of gold is not high. It ’ s been something that people turn to, but it has not been a very good investment. If you bought gold 100 years ago, it was roughly $ 20

an ounce. You ’ d have paid to store it and you ’ d have insured it and you ’ d have received no income from it at all. Your real return would be very, very poor.

Q:
One of the attributes that people apply to the gold standard is
that it exacts fi scal discipline on a government that uses gold as
backing for its currency. Do you think that ’ s true?

Warren Buffett:
We ’ re doing this interview in a state, Nebraska, where William Jennings Bryan said, “ Do not crucify mankind upon a cross of gold. ” It ’ s true that gold can act as a check on certain economic excesses, but it can act as a check, unfortunately, on economic activity, too. Its virtues become its sins, also. I do not think a gold standard would work well for the world.

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Q:
Can you comment on the federal debt and unfunded liabilities?

Is this something that you ’ re concerned about? Or do you think
we ’ re at a manageable level?

Warren Buffett:
The net federal debt is about 40 percent of GDP.

Compared to what it ’ s been historically in this country and what it is in many other countries, it ’ s not at an unreasonable level. And debt can only be measured in relation to income. You have 300

million Americans with great income potential. The government has a claim on that income in the future. It has whatever claim it wants, as a practical matter. Forty percent of GDP in that debt is not something that ’ s caused us trouble in the past. I don ’ t think it ’ s something that will cause us trouble in the future.

Q:
What do you think of the defi cit reduction of the ’90s and some
of the fi nancial policies of the last seven or eight years? Would
you like to see defi cit reduction? Do you think that piling up
defi cits is a bad thing?

Warren Buffett:
I think keeping debt within a range of GDP

makes sense. I don ’ t think you want debt to climb to 100 percent of GDP. I don ’ t think you want to pay off the national debt.

And that means if GDP grows in nominal terms, 4 to 5 percent a year, and the national debt grows at 4 to 5 percent a year, you really haven ’ t changed the fundamental economic dynamics of the country any more than if Berkshire is worth $ 10 billion and owes $ 1 billion and someday later it ’ s worth $ 100 billion and owes $ 10 billion. Nothing has really changed for the worse in terms of Berkshire ’ s credit, and the same goes for the government.

Q:
Do you think that the retirement of the baby boomers will
throw a curveball at this equation?

Warren Buffett:
No, the demographics have worked somewhat against the standard of living for a long time. Retired people live in retirement much longer now than they did 50 years ago.

But the standard of living kept improving during the twentieth century, even as demographics moved away from ideal, if you ’ re talking about productivity. You had more and more people retired relative to the ones producing, and that ’ s continuing. But c14.indd 180

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productivity improves all the time, too, so it ’ s a good thing when people don ’ t have to work as hard to take care of the needs of the whole population. That ’ s what ’ s been happening over the years, and I think it ’ ll continue to happen.

Q:
The speed at which globalization has happened, to the rise
of China and economies, at the same time that the Western
economies are getting older — is that changing the equation
at all?

Warren Buffett:
What ’ s happened, to some extent, is that China has caught on to some principles that have made this economy work so well. In 1790, there were about 4 million people in the United States and there were about 290 million people in China.

They were just as smart as we were. They had a climate that was about the same as ours. They had somewhat comparable natural resources. And yet, we did enormously well over the next 217 years in improving the lives of the people here, per capita, as compared to China. Now, why did we do that? Well, we had a market system, we had a rule of law, we had equality of opportunity —

not perfectly in all cases, but probably better than much of the rest of the world — and that system unleashed the potential of citizens in the United States to an extent far greater than in many countries, including, up until recently, China. And I think maybe the Chinese have caught on to some of the benefi ts of our system and they will unleash the potential of their people as well. And there ’ s nothing bad about that. The fact that your neighbor lives well is not going to hurt how you live.

In this country, we have seen imports increase from 5 percent of GDP to 17 percent or so of GDP in the past 35 or so years. And yet we have 4.5 percent unemployment and we have a very, very prosperous country. So it ’ s a good thing for us. What is not good is the imbalance between imports and exports. We ’ ve actually increased our exports from 5 percent of GDP to about 11 percent of GDP. The rest of the world is buying more and more of our goods all the time. But at an even greater rate, we ’ re buying more and more of theirs. That ’ s not good. More trade overall is good as c14.indd 181

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long as it ’ s true trade. If it ’ s pseudo - trade, where we ’ re buying but not selling, I do not think that ’ s good over time.

Q:
Is there a way to correct the trade path that we ’ re on, and if so,
what is it?

Warren Buffett:
It ’ s complicated. I reluctantly think that it probably requires some governmental policies that will lead to imports and exports actually increasing, but coming much closer to balancing imports and exports. I think that ’ s advisable. I don ’ t think the world comes to an end if it doesn ’ t happen this year or next year, but piling up more and more and more external debt and having the rest of the world own more and more of the United States may create real political instability down the line, and increase the possibility that demagogues come along and do some very foolish things.

Q:
You ’ ve said before that manufacturing is not the ideal business,
but securities is, and sort of like losing the productive capacity
of the companies. Am I getting that right?

Warren Buffett:
Yes. If you go back 100 years, a very high percentage of the people worked on farms. And if you ’ d said to people at that time, somebody ’ s going to invent an automotive engine, and tractors will replace horses, and you ’ ll need fewer people and you ’ ll have combines and planters, undoubtedly there would have been all kinds of scary headlines saying, “ Eighty Percent of Farmers to be Unemployed. ” People would have asked what they were going to do, and would have expected the world to come to an end, and that they ’ d all be sitting around. That isn ’ t what happens at all.

What happens is that you get more productive. People are freed up to go up into other things. We didn ’ t have motion pictures back 100 years ago. That industry employs a lot of people now. It ’ s not a blessing to the individuals, and there ought to be a big safety net for the people that get hit hard in their specifi c industries. But it ’ s a blessing when fewer people can accomplish the same goals. The railroad industry, at one time, employed a million people in this country. Now there ’ s about 200,000, and they ’ re hauling far more c14.indd 182

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freight than they did when they employed the million people. If you ’ d predicted 40 or 50 years ago that 800,000 people were going to lose their jobs in rails, all of the rail workers would have formed committees and looked for congressmen to protect them and that sort of thing. But in the end, that ’ s what capitalism ’ s all about: fi nding ways that fewer people can do the same job, so that the people released can turn out even more goods and services that people want.

Q:
Would you say that, just in your approach to business, a
higher percentage now comes from services? Or does a higher
percentage of the business opportunities come from fi nancial
services?

Warren Buffett:
Manufacturing has gotten more productive at a rate faster than most service industries have. If you look at a philharmonic orchestra from 50 years ago and now, there probably hasn ’ t been a big change in productivity. There hasn ’ t been much change in productivity, for example, in higher education. The output compared to the input of hours has not improved dramatically. On the other hand, if you look at a ton of steel, if you look at a freight car moving, if you look at a car produced, you ’ ll see enormous increases in productivity. So in manufacturing, we now get more and more goods with fewer and fewer people. But that leaves those people available to do other things that we want them to do, whether it ’ s engage in heavyweight fi ghts or play in the philharmonic or do all kinds of things, and we still have as many cars and tons of steel and freight cars moving as we had in the past. But that ’ s all to the good. That ’ s what ’ s improved the standard of living in this country.

Q:
So you ’ re not concerned, then, by the impact of lowering wage
rates from other competing economies?

Warren Buffett:
Overall, we ’ re better off if we can get somebody else to do the things they do best, and we do the things we do best. And, like I say, in the last 35 years or so we have managed to get huge increases in the standard of living while we import about c14.indd 183

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17 percent of our GDP as opposed to 5 percent, and people are living better and we ’ ve got 4.5 percent unemployment.

But economics is not simple stuff. To help people really understand it is not simple, and there are so many people that want to make it simple for their own purposes, or who have got some particular crusade they ’ re on. We came fairly close to the whole system imploding in the 1930s because of economic conditions. People became very responsive to communism in this country. They became responsive to Huey Long. They became responsive to the Townsend Plan in California. When people are scared about economics, they ’ ll listen to whoever is the most persuasive.

Q:
Is that the rise of demagoguery?

Warren Buffett:
It really is. One thing I don ’ t like about the consequences of sustained large trade defi cits is I think it makes the potential for demagoguery and really foolish policies more likely over time. When you think about the history of this country, our economic policies have been pretty darn good. I mean, any country that delivers a seven for one increase in per capita living in a century has done an awful lot of things right. It ’ s never happened before in mankind. If you go back three or four hundred years ago, nothing has really changed. But, of course, you and I live far better than John D. Rockefeller lived. We can attend the World Series. We can stay cool in summer and warm in winter far easier than he could. We can move around the country in a fraction of the time he could. All kinds of benefi ts have been showered upon us by the system, essentially. So it has worked out pretty well. There are always problems, but you want to make sure that you don ’ t throw out the baby with the bathwater.

Q:
Could you just talk about your business philosophy, and
what is appealing to you when you see a business? What is
it that you ’ re looking for when you are looking to grow your
business?

Warren Buffett:
In businesses, we ’ re looking for an entity that has durable competitive advantage; somebody that not only is doing c14.indd 184

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well now, but will do well 10 or 20 years from now. In capitalism, when you have a wonderful business, it ’ s like having an economic castle. And the nature of capitalism is that people want to come in and take your castle. It ’ s perfectly understandable. If I ’ m selling television sets, there ’ s going to be 10 other people who are going to try and sell a better television set. If I have a restaurant here in Omaha, people are going to try and copy my menu and give more parking and take my chef and so on. So capitalism ’ s all about somebody coming and trying to take the castle.

Now, what you need is you need a castle that has some durable competitive advantage — a castle that has a moat around it. One of the best moats in many respects is to be a low - cost producer.

But sometimes the moat is just having more talent. If you ’ re the heavyweight champion of the world and you keep knocking out people, or if you ’ re Steven Spielberg and can turn out great motion pictures, you ’ ve got a competitive advantage as long as you can keep doing it. It has enormous economic value.