I.O.U.S.A. (49 page)

We ’ re looking for that institutionalized. We ’ re not looking for the best brain surgeon in town. We ’ re looking for the Mayo Clinic. We want an institution that, regardless of the person in charge, will maintain that competitive advantage over the decades. We hope we fi nd that in some businesses, and then we try to get the best person that we can to run them. Usually, it ’ s the person who ’ s been running them.

Q:
Are you always right, or do you make mistakes?

Warren Buffett:
No, we make mistakes. It wouldn ’ t be any fun if we didn ’ t make mistakes. If I played golf and on every one of the 18 holes I hit a hole in one, I wouldn ’ t be playing golf for very long. You have to go into the rough occasionally to make the game interesting. Not too often, though.

Q:
Your father was a politician. Can you talk about the role of
leadership in our country?

Warren Buffett:
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this enormously rich country, it ’ s very important who you have in positions of leadership. It ’ s important who you have in the legislative body and it ’ s very important who you have as the head administrator of the country. You want someone who can see beyond the next mountain, and who can get people to follow him to the next mountain, because the populace wants to be led but they have to believe in the leader. That was dramatically illustrated when Roosevelt came in early 1933. We had a country with enormous horsepower, but the motor wasn ’ t working. And it was turning out a very small fraction of the horsepower it was capable of. I don ’ t know what the population was then, but it was well over 100 million people, and we had the plants and we had the soil. We had the people. And the machine wasn ’ t working. It took leadership to get that machine to function again as it was capable of functioning, and that meant all the difference in the world.

You needed inspiring leadership then, something people believed in. The same is true in wartime and it will be in the future. The nice thing about our country is that even when we have had poor leadership, we ’ ve still done pretty well. I ’ ve always said in investments, that you really want to buy a company that ’ s so good that an idiot can run it, because sooner or later one will. We ’ ve had 43 presidents now, and all 43 haven ’ t been homerun hitters, but the country ’ s done awfully well. Sometimes it ’ s done well in spite of them and sometimes it ’ s done well because of them, but it ’ s really nice to know that we ’ ve got a machine that works so well, even if we don ’ t have the best of leaders at all times. We still ought to try and have the best leader we can.

Q:
Why do you always refer to U.S. bonds as risk - free investments?

Warren Buffett:
They ’ re not free of purchasing power risk, but they will always be paid in dollars.

Q:
Can you just explain to me, as an investor, what you use the
bond market for?

Warren Buffett:
On balance, we like only businesses. Aside from your own personal talents, a good business is the best asset there is. I mean, the best investment you can make is in yourself.

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If you have a 300 - horsepower motor and you ’ re only getting 100

horsepower out of it, you want to develop whatever skills are needed to make yourself the most effective human being. But beyond that, the best investment is a good business, one that has a durable competitive advantage and that will be around 10 or 20 or 50 or 100 years from now, turning out something people want at a profi t. The U.S. government bond is absolutely certain to be paid. It ’ s just total nonsense when people talk about the U. S. going bankrupt. I mean, the U.S. government will always pay its debts. The purchasing power of the dollar you receive is likely to be less than the dollar that you invested, so you have a purchasing power risk. But you don ’ t have a payment risk with U.S. government bonds. So we would rather own a good business

[with U.S. government bonds] which is likely to fl ourish almost under any circumstances and where, if there ’ s a lot of infl ation, we ’ ll earn just as much in terms of real dollars as we would today.

But you should not be afraid of government bonds in terms of being paid.

Q:
Would you see a problem if somewhere like China, for
instance, stopped putting so much money back into the bonds?

Warren Buffett:
People get very confused about what will happen if, say, the Chinese or other countries dump their government bonds. If we buy $ 2 billion more of goods today than we sell to the rest of the world, which is more or less what happens, the rest of the world gets $ 2 billion worth of something, don ’ t they? They get these little claim checks called U.S. dollars. They can exchange those U.S. dollars for U.S. government bonds, they can buy stocks here, they can buy real estate here, but they have to buy something.

So let ’ s say the Chinese have $ 1 trillion worth of U.S. government bonds. Let ’ s say they decided to sell them. If they sell them in the United States, they get dollars. What do they do with the dollars?

They have to buy some other asset in the United States. They can trade those government bonds for stocks, but that just creates more demand for stocks and less for bonds. But that ’ s happening every day for other reasons.

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Now, they also could sell that trillion dollars to the French and get euros in exchange, but now the French would own them. If they dumped foreign assets on the United States, they get other United States assets. Countries can trade them around among themselves. If the British prefer to have dollars and the Chinese prefer to have pounds, you will fi nd them making an exchange.

But the Chinese — or any other country — can ’ t dump their U.S.

government bonds and have some terrible depressing effect on the United States because in exchange they ’ ll get dollars, and what do they do with the dollars? They put them in banks or something of the sort. They buy stocks with them. They buy real estate.

So it ’ s exactly like saying, “ If I ’ ve got a billion dollars worth of government bonds and I want to sell them, well, I ’ ll get a billion dollars worth of cash and I ’ ve got to buy something else. ” And that something else may be my government bonds.

But the most important question in economics is, “ And then what? ” After all, you can ’ t do just one thing in economics.

Anything you do triggers another corresponding action. So if somebody says to you, “ The Chinese are going to sell a trillion dollars worth of government bonds, ” then just say, “ And then what? What do they get? ” They get a trillion dollars worth of cash if they sell them in the United States. They put the cash in bonds here, or they put them into other bonds. They put them in stocks, real estate, or something of the sort.

What does happen, of course, is if they pile up more and more assets abroad, we have to pay them interest on that. We have a servicing cost, and that ’ s where 2 or 3 percent of the GDP of the country could go 10 or 20 years from now, and I think that can be politically very unstable.

Q:
How so?

Warren Buffett:
If the American worker were told by a politician 20 years from now that, when he works 40 hours, an hour and a half of that every week is going simply to service the debts incurred by the previous generation because they overconsumed, I think that he would say, “ I ’ m not interested in doing that anymore. ”

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Let ’ s take an extreme example. At the time of the Revolution, we ’ d send somebody over to King George, and he ’ d say, “ Listen, this fi ght is hardly worth it. A lot of people will be killed. Why don ’ t we just make a deal with you? We want our independence. We ’ re kind of a pain in the neck anyway. So why don ’ t we just give you 3 percent of our output forever, and you give us our freedom? ”

Now, King George might have liked that, and the American colonists might have liked that. We weren ’ t producing that much anyway. It saves you going to war, maybe getting shot and killed.

So the fi rst generation would say, “ It ’ s a fair deal. ” Three percent royalty to the English, we get our freedom, and nobody gets killed.

The next generation might even be okay with this.

It wouldn ’ t work now. If we were giving 3 percent of the output of the United States to England for freeing us 220 or however many years ago, we ’ d have fought a war with them over it or we ’ d have repudiated it.

That ’ s an extreme case, obviously, but if 15 or 20 years from now, 2 or 3 percent of the GDP is being paid abroad merely to service the debts or the ownership of assets that have been incurred because we ’ re overconsuming, that will be politically unstable. Many years ago, when we lent a lot of money to various emerging countries and were having trouble getting paid back, somebody said that they found it very hard to imagine some Philippine or Thailand worker spending a couple of extra hours every week in the hot sun merely so Citicorp could increase its dividend twice a year. At a point, people just say, “ To hell with it. ” It ’ s much easier just to infl ate your way out of it. If you ’ re in a South American or Asian country that owes money in dollars, it gets very binding to pay back in dollars. But if you owe it in your own currency, you just print more currency. And we have the ability to print more currency. We can denominate debt in our own currency, whereas many countries can ’ t because people don ’ t trust them.

Q:
China is the largest consumer of U.S. debt right now. If they
were to slow down the purchasing, then the Treasury has to
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increase the interest rate in order to raise the money that they
need. Is that right?

Warren Buffett:
Yes. Hypothetically, let ’ s say that right now China may be running a trade surplus with us of $ 250 billion a year. Part of that surplus, they used to fi nance a defi cit they run with the rest of the world. In other words, their total trade surplus is less than the $ 250 billion they ’ re running with us. Now, they ’ re also running a trade defi cit with the rest of the world. So, some of the surplus with us goes to that. Some of the surplus is used to buy U.S. assets.

In this hypothetic situation, we ’ ll say they ’ re putting the whole $ 250

billion in U.S. treasuries each year, so they are a net buyer of $ 250

billion in U.S. treasuries. Now, let ’ s say they decide they ’ d rather buy $ 100 billion a year of U.S. treasuries. That simply means they put the other $ 150 billion in other assets that they buy here. They might buy stocks, they might buy businesses, and they might buy real estate. If they buy those stocks, bonds, and real estate, they hand that $ 150 billion to those people for those assets, and those people can go buy the Treasury bills. If I quit buying bonds today and start buying stocks, or if I quit buying stocks and buy bonds, it ’ s very hard to measure exactly what effect that will have on stock or bond markets, because there ’ s somebody on the other side of every transaction. You always have to say, “ And then what? ”

Q:
Are we going down a road where the trade defi cit is really going
to become dangerous?

Warren Buffett:
I think it will have political effects at some point.

It will decrease the rate of gain in the standard of living for the average American over time. In my opinion, it will not turn it negative under any circumstances I can foresee, but it does reduce the rate of gain in the standard of living that American workers will experience.

Q:
If you can imagine you ’ re eight or ten years old, and you are
hopping in your little boat that ’ s your life, what are the things
that set you on the kind of choice that you ’ ve sailed?

Warren Buffett:
I was extraordinarily lucky. The odds were almost 50 to 1 against me being born in the United States. In 1930, of c14.indd 190

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all the live births in the world, one out of 50, roughly, was in the United States. And then I was born to a couple of parents who cared a lot about me, who believed in education, who took good care of me, and I was wired to do well in a certain part of a market system that pays off enormously in a rich capitalist country. I ’ d been born a few hundred years ago, it wouldn ’ t have paid off the same way. If I ’ d been born in Bangladesh, it wouldn ’ t have been paid off the same way. I didn ’ t have anything to do with that wiring. I could have been wired to play chess, and there ’ s no money in chess. It would have required just as much brain power and hard work, but that ’ s not where the market system paid off.

I happen to be in something called capital allocation or asset allocation, and in a very rich capitalist system, asset allocation pays off in a disproportionate way to any real contribution to the society. I ’ ve been very lucky that way.

Q:
Do you see money and capital assets strictly as a sort of a
strategic tool that you can use to create more? How do you view
money?

Warren Buffett:
Well, money is a claim check on the output of others in the future. If I have a pile of dollar bills or if I have a pile of stock certifi cates or a pile of bonds, those represent claim checks which I or a charity or my descendants or my spouse or whoever can use to exchange for the goods and services produced by others. Somebody else will work for that. If I wanted to, I could hire thousands of people to sit everyday and paint my portrait, you know? And they would be employed, and I could use these claim checks and I could look for the perfect portrait of myself. I would never fi nd it, because I don ’ t look like Arnold Schwarzenegger, but I could keep looking for the guy that would try and make me look that way. And I could keep handing out these claim checks, and I would command that person ’ s services the rest of their life. They wouldn ’ t do anything else for society at all. Or I could build myself a wonderful pyramid.