Riding the Tailwinds of Fiat Money Inflation to Fame and Fortune

Warren Buffett bought his first shares of stock when he was 11 years old.  He saved up $114.75 and “went all in,” purchasing three shares of Cities Service preferred stock.  The day was March 11, 1942 – nearly 77 years ago.  Buffett recently reminisced about this purchase in his annual letter to shareholders:

“I had become a capitalist, and it felt good.”

The Oracle of Omaha – he was a great stock picker (lately he is suffering from “style drift”), but he also had the tailwinds of the greatest fiat money inflation in human history at his back during his entire career. Buffett would undoubtedly have been a great investor without it as well, but one cannot deny that the unanchored fiat money system was highly conducive to paving his way to success. [PT]

Buffett was merely getting started.  Over the succeeding 77 years Buffett’s investing acumen, and a rising tide of government sponsored fake money, garnered him a personal net worth over $80 billion.  That’s a breathtaking haul, indeed.

Most nights Buffett sleeps well.  Why wouldn’t he?  He’s got more dough than he could ever possibly spend.  And as for the burden of extreme wealth, Buffett’s been given a nifty – tax free – escape route from beneath the mass of this weighty condition.

His pal Bill Gates, via the Bill & Melinda Gates Foundation, offloaded his conscience and flattered his ego.  Thus, even in the late night hours, when the coyote’s howl at a full moon, Buffett sleeps soundly and with the full knowledge that his fortune will be used for noble philanthropic causes.

Buffett has pledged to give more than 99 percent of his wealth for benevolent endeavors. This we neither applaud nor do we find fault with it.  How one chooses to spend one’s wealth is a personal decision.  Perhaps some good will come of it.

As an aside, foundations are frequently used by the ultra-wealthy as a means to pass on their wealth, while avoiding estate taxes.  Remember, someone – likely a familial heir – has to run the foundation well into the future.  A well-structured foundation leaves descendants with good work, at good incomes, for generations.

We don’t know whether this is the case with Buffett’s ventures with the Bill & Melinda Gates foundation. We do know that Buffett is a master at limiting his income tax obligations.  Perhaps he has applied this predilection to limiting his estate tax disbursements too.

Again, we neither applaud nor find fault with how Buffett chooses to spend his personal wealth; we are merely adding context to the popular refrain of the goodness of his philanthropic benevolence.

Berkshire Hathaway, weekly – this is what the stock of Buffett’s company has essentially been doing since the 1970s, i.e., it went up and up and up. The “A” shares were never split to our knowledge, which is why buying a single one will set you back by more than 300,000 smackers. This is also the reason why a class of “B” shares was created, so as to enable the paupers  weighed down with slightly less moolah to partake in the BRK goodness as well. [PT]

“All In”

Beneath the wealth and affluence Buffett is still human, of course.  He will be asked to explain himself when he meets his Maker.  And in the interim, there is still one remaining fear that gets caught up in his mind’s eye during the darkness just before dawn… like a fly in a spider’s web.

Buffett first “went all in” to American business in 1942.  He has remained all in up to the present.  His timing has been impeccable.  He has ridden the crest of the American wave of economic dominance, and unprecedented issuance of debt based fiat money like no other man.

Top dog goes all in… at just the right time. [PT]

Illustration by C. M. Coolidge

What’s more, the success of his thrilling ride has led him to believe he can predict the future by extrapolating the past.  From his recent letter to shareholders:

“If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter).  That is a gain of 5,288 for 1.  Meanwhile, a $1 million investment by a tax-free institution of that time – say, a pension fund or college endowment – would have grown to about $5.3 billion.

“Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various “helpers,” such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion.  That’s what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.”

Buffett then took a moment to knock the doom and gloom concerns of runaway debts and deficits.  He also took an errant swing at gold buyers:

“Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods.  That’s 40,000%!  Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency.  To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 ¼ ounces of gold with your $114.75.

“And what would that supposed protection have delivered?  You would now have an asset worth about $4,200,less than 1% of what would have been realized from a simple unmanaged investment in American business.”

Hidden within Buffett’s boasts and blusters is his final remaining fear…

Why Warren Buffett Should Buy Gold

Buffett, you see, is locked in – with no escape route – and will have to ride the American wave of economic dominance, and its fake money system, as it crashes down upon the jagged rocks.  His remaining fear is that the status quo will be overturned.  That a social, political, and financial reset obliterates the wealth edifice that he has erected over the last 77 years.

To clarify, a reset is a complete collapse of the world as we know it.  Certainly, history has seen plenty of resets.  WWI and WWII.  The French Revolution.  The Russian Revolution.  The War between the States.  The Great Depression.

Sometimes there is great upheaval, including revolutions. In this example from Russia in 1917, all capitalists ended up expropriated and many were hounded to death in waves of “red terror” organized by the new ruling class. Soon the whole country was even more miserable than before, but by the time the masses realized this, it was too late. [PT]

No doubt, the present order is long overdue for a reset.  And when the current reset hits its fever pitch, Buffett’s holdings – which are concentrated in American businesses – will be directly impacted.

Of course, wealth is more than just money.  And some of Buffett’s businesses will hold up better than others through the reset.  For example, his railroads will still be an important asset – assuming he has the capital to operate and maintain them.  But his insurance businesses – his greatest money makers of all – are a construct of dollar based fiat money, and their ephemeral value will disappear before you can say Jack Robinson.

Being “all in” – to use Buffett’s words – on anything is a bad idea.  This goes for being fully invested in American businesses, or an S&P 500 index fund.  It also goes for being all in with gold.

Buffett’s other mistake is in equating gold to an investment.  It is not.  Gold, on the other hand, is real money that retains its purchasing power over time – including through epic resets.  Hence, misconstruing gold as an investment will be fatal.

As indicated by the shape of the content of this treasure chest, gold was historically mainly used as money. It emerged as the most marketable commodity all over the world in a lengthy process of trial and error; no committees or government diktats were required for this to happen. Gold was the market-chosen money, and despite having been officially “demonetized” by governments, it retains its “moneyness” to this day – as is evidenced by how the markets are treating it. [PT]

Fiat money, unlike gold, has an unblemished record of perfection.  All fiat money eventually returns to its intrinsic value of fire kindling, toilet paper, or birdcage liner.  Fiat based digital monetary credits will also ultimately disappear, like AOC’s cow flatulence, into the atmosphere.

This is precisely why Warren Buffett should buy gold… and why you should too.

Chart by: StockCharts

Editing and chart & image captions by PT

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.