Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [104]
Warren and Charlie Munger avoid leverage, because it makes it much easier for people to trust that Berkshire Hathaway will always meet its obligations and keep its genuine AAA rating. Furthermore, since its businesses are throwing off so much cash, Berkshire Hathaway’s ship is always coming in. Berkshire Hathaway’s businesses throw off cash of around $100 million per week. It has no problem meeting obligations. Its problem is finding more good businesses in which to invest all of this money.
The third kind of money is fiat money (this is not money to buy a designer car, as many young Wall Street bankers seem to think), such as the pieces of paper your government prints and issues as its currency notes. Fiat money is not backed by a commodity. Fiat money is not backed by assets (unlike a check which is backed by checking deposits). The faith and credit of a government back fiat money.The world relied on commodities such as gold until we formed the nation-states. Until then, we did not trust each other’s coins and printed papers. Until the beginning of the twenty-first century, hard currencies, defined as reliable currencies, included the U.S. dollar, Swiss franc, pound sterling, Deutsche mark (now replaced by the euro), and Japanese yen. The Deutsche mark (before the euro) and dollar held premier positions as reliable global currencies. By 2008, the dollar’s reliability as a store of value lost credibility as the world looks askance at the United States’ inconsistent policies and disastrous dollar diluting actions. China’s currency, the renmimbi, is gaining credibility. Some consider it an emerging hard currency, but that remains to be seen. When it comes to money, government matters. If you live in a Third-World country and your government is run by corrupt thugs who loot the treasury and destroy the local economy, your country’s fiat money will be nearly worthless to the international community. It is a lot harder to shake down a currency like the United States dollar. The United States is still a rich country, so a little corruption will not destroy the currency. But a lot of corruption combined with making promises for which we cannot pay (a $9 trillion national debt) and lower productivity are destroying faith in the U.S. dollar. Lately, the United States policymakers have demonstrated a twisted genius for causing the dollar to lose value.
In finance, credibility is extremely important. Warren Buffett and Charlie Munger educate Berkshire Hathaway’s 40,000 odd shareholders so that they understand that Berkshire Hathaway’s AAA rating is solid.The entire financial community trusts it.Washington should have worked hard to make sure the dollar kept its credibility in the global financial markets.
The dollar is weakening partly because of growing U.S. current account deficit. The United States used to produce more than it consumes, and the rest of the world owed us. We reached a turning point in 2006 and headed in the wrong direction. We started consuming more than we produce. We now shovel $2 billion per day out the door and into the pockets of the rest of the world. It is as if we have a large lot of land and are selling off the fringes of our gardens so we can buy more consumable goods for the house.We are transferring a part of the ownership of our country abroad. For the first time in about 100 years, we are relying on credit with the rest of the world and have become a net seller of our assets to subsidize our spending habits. The current generation