In recent times, billionaire investor and American icon Warren Buffett has adopted a notably low profile. This marks a stark contrast to his active involvement during the 2008-09 financial crisis when he eagerly provided capital to companies like Goldman Sachs and Bank of America in exchange for lucrative interest rates and warrants. Today, however, his approach has shifted significantly.
Instead of making high-profile deals, Buffett admits he’s “…drinking a little more Coca-Cola” as a precaution against the coronavirus. But is that his only strategy? His admirer, Bill Ackman, doesn’t think so. Ackman, who has been actively purchasing stocks, believes the Oracle of Omaha has some hidden plans. When he was recently asked about Buffett’s strategies, he remarked:
“Ackman said he suspected his mentor was quietly using his $125 billion in cash to invest in stocks. He was keeping a low profile to ensure that stock prices remained low while he was buying. ‘Once he invests that $100 billion and more,’ Ackman says, ‘he’ll announce it to the world.’”
That may very well be true. It certainly bodes well for both Buffett and Ackman. If they want to funnel billions into stocks at present, more power to them.
However, for most individuals, the pressing concerns are much graver than stock investments. Many have lost their jobs, and their civil liberties have been significantly curtailed by authorities acting in the name of safety. This context makes the insights of Howard Buffett—Warren’s father—far more applicable to our current reality.
The elder Buffett, who passed away over fifty years ago, served as a member of the U.S. House of Representatives in the 1940s and 1950s. He was a Republican during an era when the party upheld meaningful principles. According to his wife:
“He considered only one question when deciding to support a bill: ‘Will this add to or subtract from human liberty?’”
Money and Freedom
Except for Thomas Massie, today’s lawmakers largely ignored Howard Buffett’s pivotal inquiry when they voted on the CARES Act. A similar disregard was evident in the recent Interim Economic Stimulus Package vote. As trillions in government bailout funds flood the economy, alongside the subsequent servitude imposed on Americans, it’s crucial to revisit one of Howard Buffett’s fundamental insights.
This insight, while seemingly basic, is overlooked by nearly every contemporary government official. In his 1948 article, Human Freedom Rests on Gold Redeemable Money, Representative Buffett began:
“Is there a connection between Human Freedom and Gold Redeemable Money? It may seem that money is solely economic, while human freedom belongs to the political realm.”
“However, when you consider that one of the first acts of Lenin, Mussolini, and Hitler was to criminalize individual ownership of gold, it suggests a link between gold-backed money and the precious asset of human liberty.”
“Moreover, when you recognize that Lenin declared and acted upon the principle that printing paper money was an effective means to dismantle the social order and introduce communism, the relationship between gold-backed currency and human freedom becomes even more compelling.”
Representative Buffett elaborated on the connection between money and freedom, arguing that, without a redeemable currency, individuals’ ability to sustain themselves or manage their property is contingent on the whims of politicians. He further asserted that paper money systems invariably lead to collapse and chaos, while a gold standard affords greater control over government expenditures and empowers citizens regarding public finances.
Since Representative Buffett’s time, the repercussions of non-redeemable paper currency have grown increasingly concerning. The consequences of the CARES Act and its exponential increase in money supply have now reached a critical threshold.
Currently, deflationary pressures are escalating. Oil demand has plummeted, driving oil prices into negative territory, and many businesses are on the brink of failure. Unemployment claims have surged to staggering levels—26 million in just five weeks. Mortgage delinquencies are piling up like debris at a flood site. Hopes for a swift V-shaped recovery have all but dissipated.
In response to deflation, the Fed is unleashing massive quantities of money. Their balance sheet is projected to approach $10 trillion by year-end. The aim is to stabilize credit markets, rescue businesses, support the stock market, and fund unemployment benefits, all to prevent widespread defaults in the U.S. economy.
Additionally, “helicopter money” is being distributed to consumers, creating the conditions for significant inflation—albeit the timeline remains uncertain.
With extensive money printing without a corresponding increase in production, deflation will eventually transition into inflation. To grasp what the future holds, it’s helpful to contrast the historical trajectory of currencies in the U.S. and its southern neighbors.
Pesos and Dollars
Currencies on both sides of the Rio Grande have undeniably changed; what was once reliable is now volatile. Generations ago, both currencies were as trustworthy as the crowing of a rooster at dawn. Today, they are more akin to the deceptive nature of political promises. We can ascertain this not from textbooks or secondhand accounts, but from the tangible evidence of a silver dollar and a silver peso.
For instance, the Peace Dollar, minted in 1921, represented a single U.S. dollar, equating to 0.77344 troy ounces of silver. In contrast, the 1922 Un Peso, a Mexican silver peso, was valued at one peso and contained 0.3856 troy ounces of silver.
The exchange rate used to be straightforward: based on their silver content, two pesos equated to one dollar. Today, however, both pesos and dollars exist primarily as paper notes issued by central banks. Their value now hinges on governmental trustworthiness, military strength, and international perceptions of each government’s ability to meet debt obligations.
Currently, approximately 24.77 pesos are needed to acquire one dollar, highlighting the Mexican government’s challenges in managing its currency compared to the U.S. government over the last century. More importantly, when measured against silver, the narrative shifts dramatically for both currencies.
In the 1920s, an ounce of silver cost about $1.29; today, it is around $15.17. This means silver now costs 1,076 percent more in dollar terms than it did in the 1920s. In pesos, the situation is even more dire. In 1922, buying an ounce of silver required just 2.58 pesos, while now it takes a staggering 375.76 pesos—an increase of 14,464 percent in peso terms.
While inflation in the U.S. remains insidious, it is relatively subtle compared to Mexico’s experiences. However, with the Fed’s attempt to devalue the dollar in a bid to rescue the economy, we could soon see a rapid shift from mild inflation to hyperinflation.
It’s predicted that the peso will suffer alongside the dollar. Yet, Mexicans are all too familiar with this cycle, having gone through similar episodes repeatedly since 1980. Just recently, Fitch downgraded Mexico’s sovereign rating to one notch above junk (i.e., BBB-).
The key takeaway is that Mexicans possess a deeper understanding of zeros than many Americans currently do. However, in the coming years, as inflation pressures mount, Americans too will learn about the cost of zeros.
What You Must Know About Zeros in the Years Ahead
The way zeros multiply when money is devalued by governments is comparable to how mold spreads on damp walls. They appear unwanted, creeping into the back of all prices.
During visits to relatives in Mexico City, we have seen firsthand how zeros proliferate. In 2004, the exchange rate was approximately 10-to-1, with 10 pesos equating to $1. This simplicity made it easy to assess whether prices were fair based on our familiar dollar reference point. For instance, if a merchant charged 10 pesos for a Coca-Cola (Buffett’s beverage of choice), we could instantly recognize it as $1—similar to what we’d pay in the USA. A price of 500 pesos for a pair of exquisite handcrafted leather shoes translated to $50—a great deal.
Although this may appear trivial, especially in a climate with negative oil prices, it foreshadows a future where the U.S. economy becomes inundated with the Fed’s immense influx of money. This tidal wave of cash will inevitably shift deflation into inflation over time.
Initially, as prices rise, government economists may misinterpret it as an economic upswing and recovery. But by the time the reality of inflation becomes evident, it will be too late to intervene. That’s when Americans will start to grasp the meaning of zeros—manifesting in the surge of consumer prices.
Your $3 cup of coffee at Starbucks could skyrocket to $30. A $1 can of Coca-Cola might cost $10, and a $50 pair of shoes might climb to $500.
In fact, an inflation rate of 1,000 percent provides just enough impetus to add a zero to the end of all prices. While this sounds extreme, it isn’t outside the realm of reality. Historical instances of hyperinflation vividly illustrate this phenomenon.
In Weimar Germany, for example, inflation surged to rates of over 30,000 percent monthly in 1923, with prices doubling every few days. Zeros became omnipresent. In Zimbabwe between 2007 and 2009, hyperinflation peaked at an astonishing 79 billion percent per month. And in Hungary in 1946, daily inflation soared beyond 200 percent, translating to an annual rate exceeding 13 quadrillion percent—numbers far too large to comprehend.
For those excited about the prospect of a $350,000 mortgage being eroded to $35,000, caution is warranted. While your financial burden may eventually lighten, the initial shock—when consumer prices escalate and wage growth stagnates—will be harsh.
Perhaps if you weather that initial crisis, you might fare well in the long run. But any potential gains will be overshadowed by the turmoil and social disarray triggered by rampant inflation. For instance, a $1 million IRA saved over a 40-year career could plummet in purchasing power to $100,000. It would feel as though a zero was unceremoniously stripped from the back of your life savings.
Indeed, Howard Buffett’s insights hold true even today. This is the mechanism by which zeros multiply when governments conspire to undermine currency, leading to profound ramifications for all.
Sincerely,
MN Gordon
for Economic Prism
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