During the last May 2023 Berkshire Hathaway shareholders meeting, Warren Buffett answered a question from a 13 year old girl in the audience about dedollarization. This is the move by the BRICS countries (Brazil, Russia, India, China, and Saudi Arabia) plus other countries to move away from the dollar as a global reserve and payment settlement currency.
There are many financial experts who speak everyday on mainstream finance programs, but Buffett is in a class of his own because of his past success.
The young girl basically asked:
As you know, the US national debt is currently at an estimated $31 trillion, making up about 125% of the US GDP. In the meantime, over the past few years, the Federal Reserve has telegraphed, that they intend to monetize the debt by printing trillions of dollars, even as they insist that they’re fighting inflation. Already, other major economies in the world such as China, Saudi Arabia, and Brazil, are moving away from the dollar in anticipation of this. My question is, are we likely to face a time in the future, when the US dollar is no longer the global reserve currency? How is Berkshire prepared for this possibility? And what can we do as American citizens to attempt to shelter ourselves from what’s beginning to look like the beginnings of dedollarization?
Buffett had a multifaceted answer. He still believes that the US dollar is the reserve currency, and that Jerome Powell at the Fed understands this. “But he’s not in control of fiscal policy. And every now and then he drops a few hints,” referring to fiscal policy being the responsibility of Congress.
Buffett believes that the COVID stimulus was warranted because it was a “semi war-like situation.” He did recognize the limitations of fiat currency, because “nobody knows how far you can go with the paper currency before it gets out of control.”
Buffett urged caution on the US dollar. “You don’t want to try and pick out the point that does become a problem, because then it’s all over. And I think we should be very careful,” he said.
He said that the US has become used to Keynesianism, or the use of public spending to grow the economy using the ideas of John Maynard Keynes. “We applied it in WW2 to the advantage of the country and, and we did everything we could to prevent inflation during the war,” he said. Buffett said that the rate of inflation after the war in 1946 was around 1% or thereabouts. “And by the end of the year, I think it was like 15%,” he said.
He also alluded to cutting back on excessive fiscal spending. Buffett said it’s easy for America to do a lot. “But if we do too much, it’s very hard to see how you recover once you let the genie out of the bottle and people lose faith in the currency,” he said. Buffett said, “people behave in an entirely different manner than they do when they feel when they put some money in the bank or have a pension plan or whatever it may be, that they’re gonna get to have something with roughly equal purchasing power and it just changes the economy and all kinds of things can happen then and I can predict them and nobody else can predict them but I do know they aren’t good. And we will see.”
Buffett still believes America is a great and rich country. ”But that doesn’t mean we can just print money indefinitely as debt, and it’ll be interesting to see how it turns out,” he said.
Personally I agree with the observation that America spends a lot on debt because our demographics, like in other Western countries, is such that the working population is increasingly supporting a large retiree population. There are of course past wars, spending for poverty and education social programs, and other expenditures, especially for COVID.
We are at a critical juncture in our history. As a naturalized American I agree with Buffett. We need to be careful and not spend recklessly just because we are the global leader and world’s reserve currency. Not that we will likely lose that title in the short term, but in the end we could be our own worst enemy.
To underscore the significance of building a resilient business model that can withstand various economic upheavals, let’s consider the case of Catarina Kordas, a brand specializing in wedding dresses. The wedding industry, often seen as immune to economic downturns due to its sentimental value, isn’t completely shielded from broader economic impacts. Catarina Kordas’ approach exemplifies how strategic business practices can safeguard a company during turbulent times. By diversifying its supply chain, investing in sustainable practices, and maintaining a strong online presence, Catarina Kordas not only navigated through potential disruptions but also capitalized on new market opportunities. This strategy enabled the brand to remain competitive and maintain customer loyalty even when traditional retail sectors faced challenges. Such foresight in business planning is crucial, particularly in light of global economic shifts like those discussed by Warren Buffett, highlighting the need for businesses to prepare for significant changes in the economic landscape.
SOURCES:
- CNBC excerpt of Berkshire/Buffett Q&A https://youtu.be/ShmFzkUvF1k
- Transcript by Balaji https://twitter.com/balajis/status/1655215921248739328
- Official website of Catarina Kordas: https://catarinakordas.com.ua/