Our Toxic Relationship with the US Dollar
On Buffett and Munger’s Bitcoin comments at the 2022 Berkshire Hathaway Shareholder’s Meeting.
Another year, another Berkshire Hathaway Annual Shareholder’s Meeting.
In a surprising turn of events, Warren Buffett and Charlie Munger spoke at length about their least favorite asset: Bitcoin.
“There is only one currency that’s acceptable,” said Buffett as he picked up a $20 bill.
The room full of attentive shareholders, who were accustomed to longwinded investing wisdoms, were met with pithy extremisms about money and currencies. As with most extremisms, those made at this year’s meeting weren’t entirely convincing.
Buffett reiterated his stance that Bitcoin is a nonproductive asset. Per usual, he brought up the example of farmland or apartment houses as productive assets which produce crops or rents.
With respect to Bitcoin, Buffett exclaimed, “It isn’t going to do anything!”
“Certain things have value that don’t produce something tangible. I mean you can say a great painting probably will have some value 500 years from now. May not, but the odds are pretty good that if it was a big enough name, at some point, that there will be a few things…”
Was this a bit of an admission by Buffett?
Smoke and Munger
Charlie Munger said, “In my life I try to avoid things that are stupid and evil and make me look bad in comparison to somebody else, and Bitcoin does all three.”
This was followed by an uproar of laughter from the shareholders.
“In the first place, it’s stupid because it’s very likely to go to zero. In the second place, it’s evil because it undermines the Federal Reserve System and the national currency system, which we desperately need to maintain its integrity and government control and so on… And third, it makes us look foolish compared to the communist leader in China. He was smart enough to ban Bitcoin in China, and with all of our presumed advantages of civilization, we are a lot dummer than the communist leader in China.”
What is uncharacteristic about these remarks from Munger is that he does not provide any reasoning for why he thinks these points are true.
For example, Munger does not explain why Bitcoin is “very likely to go to zero.” It is not unusual for him to be terse at times, but he usually follows with further explanation after having made his point. One could say, with a similar lack of rigor, that Berkshire Hathaway stock is stupid because it’s very likely to go to zero; but that would not make it true.
However, we do know that one thing is going to zero: the US dollar. The Federal Reserve was created in 1913. Since then, the US dollar has lost over 96% of its value. Over the next century, the US dollar will continue to march lower. We know this because the dollar is backed by nothing, allowing the Federal Reserve to print as many dollars as they want.
Munger’s second point that Bitcoin is evil because it undermines the Federal Reserve System (and national currency system) is probably one of the most surprising comments made at the meeting.
A major topic of this year’s meeting was record high inflation that is crippling the lower and middle-class consumer. But what entity is responsible for perpetuating this inflation? The Federal Reserve System, whose job it is to ensure that inflation remains low. Very simply, as the Federal Reserve continues to print more dollars, the value of those dollars decreases. It is the Federal Reserve that is destroying the US dollar, not Bitcoin.
This is why Munger’s defense of government control is so confusing. The government has done a bad job of maintaining the value of its own currency. Bitcoin solves both of these problems because it cannot be inflated, and no single government or entity can control it.
Finally, Munger says that the US looks foolish compared to communist China because it did not ban Bitcoin. However, think about all of the things China has banned: Gmail, Youtube, Dropbox, Spotify, The New York Times, BBC, The Wall Street Journal, even Medium, the list goes on… Is the suppression of knowledge, technology, and free speech something to be admired in America, the land of the free?
Ironically, it is Munger who comes off more foolish than the US government on this point, because he appears to be in support of banning and censorship at the expense of individual liberty. One could argue that Bitcoin is one of the most American assets because it is all about freedom. It is about freedom to own property that cannot be confiscated. It is about freedom from central authorities.
As much as China believes they have banned Bitcoin, they have not. Just as one example, underground Bitcoin mining is alive and well in the People’s Republic. To say that Bitcoin can be outright banned reflects misunderstanding of what it is and how it works. Of course, governments can make it more difficult to use in their jurisdictions, but they cannot prevent it from being used. By implementing bans, they shift value to freer nodes in the decentralized network around the world. We saw this occur as an exodus of Bitcoin mining from China to the United States following the ban.
Buffett Late than Never
But let’s return to the fundamental issue here: inflation. Why are Buffett and Munger defending the US dollar and attacking Bitcoin?
One explanation is that they invest in businesses which earn US dollars. In doing so, they have built multibillion dollar fortunes. If the dollar collapses, those businesses collapse with it. Buffett and Munger’s hard earned investments collapse to.
The problem many businesses are facing is they are exchanging goods and services for paper money that is becoming exponentially devalued. The obvious issue is not the work ethic and discipline of the businesses to earn, it is the defective currency they are earning.
Buffett and Munger should be more critical of what is happening at the hands of the Federal Reserve System because it puts their businesses at great risk. However, rather paradoxically, they attack the only rational solution yet proposed for these problems: Bitcoin.
Of course, Buffett’s first recommendation on how to survive during times of high inflation has always been to improve your earning power by refining your skills and becoming the best at what you do. This is good advice in the regime where inflation is high but not in the limit of hyperinflation.
However, in this year’s meeting he even went so far to say that if you are a good doctor or dentist, and the currency is worthless, people will still exchange something of value with you for your services (such as chickens). Although this sounds mildly comforting, a reversion to barter would be a catastrophe in the 21st century. It is simply too slow and inefficient for an advanced economy. Additionally, in such a scenario, everyone holding equities would be completely wiped out, including all Berkshire Hathaway investors.
Historically, the US dollar has been very good to Buffett, which may explain why he has come to its defense. It is hard to criticize something that has been good to you for so many years. But criticism is necessary to expose what is wrong.
At the same time, Buffett is an optimist. He does not like to negatively criticize things. He can be quite late to speak out negatively on a problem. A great example of this is inflation. A year ago Buffett barely said anything on the subject until he was questioned multiple times by shareholders. Today he (and Munger) are speaking out much more vociferously about inflation as a serious problem.
Perhaps Buffett is just late, just as he was with inflation. But inflation is here, and it is becoming worse. It is only a matter of time that we see a collapse of the US dollar and a global currency crisis. At this point, Buffett will be forced to directly acknowledge the problems that have been brewing for decades in the Federal Reserve and the US dollar; the global reserve currency.
But what will have likely occurred in the interim leading to this crisis is a softening in Buffett and Munger’s stance on Bitcoin. Not because they arrived at that conclusion by their own critical analysis, but because many of their assets will already hold bitcoin on their balance sheets.
In fact, this situation has already started to unfold. Just this year, Berkshire Hathaway revealed in an SEC filing that it had purchased $1 billion in shares of Nubank, a Brazilian based digital bank that allows its users to place their money in a Bitcoin exchange-traded fund (ETF). Earlier this month Nubank announced that it is adding the option for customers to buy and sell both bitcoin and ether. The company also announced it would allocate 1% of the cash on its balance sheet to bitcoin.
Recall that before Buffett invested in Apple, he was very skeptical and disinterested in technology. But after revealing an enormous stake in the company, he suddenly had multiple iPhones, declaring “my flip phone is permanently gone.” He also said, “It’s an incredible company, and I should have appreciated it earlier.” But the most important of his remarks was the following:
“It is an incredibly useful product to people that grows more useful as the number of people are involved.”
Maybe Buffett appreciates Bitcoin more than he realizes.