We better listen to Charlie Munger if we want to avoid “terrible trouble” and historical mistakes of inflation in how America is flirting with the dangers of recession and money printing consequences that threaten our republic, as he discussed at the 2022 Daily Journal Annual Meeting.
-Intro Charlie’s Wisdom At Daily Journal 2022
-Charlie’s Recession Warning Due To Inflation
-Consequences Of Money Printing
-America Is Flirting With Danger
-When Robots Are Coming For Your Job
-Why Is Berkshire Not Buying Stocks Or Companies?
-Prospects For DJCO’s Software Business
-Berkshire Thrives While Bureaucracies Fail
-WFH Change & World Book Encyclopedia
-Conclusion Of Charlie’s Warnings
While Charlie said that he and Warren Buffett weren’t trying to be the gurus for the world, they are “artificial, accidental gurus” said Charlie with humility.
Charlie’s thoughts on current inflation compared to the 1970s’ stagflation?
When Paul Volcker after the 70s took the primary to 20% and the government was paying 15% on its government bonds, that was a horrible recession. It lasted a long time, caused a lot of agony. I certainly hope we’re not going there again. I think the conditions that allowed Volcker to do that without interference from politicians were very unusual. I think in 20/20 hindsight it’s a good thing that he did it. I would not predict that our modern politicians would be as willing to permit a new Volcker to get that tough with the economy and bring on that kind of a recession. So I think the new troubles are likely to be different from the old troubles. You may wish you had a Volcker style recession instead of what you’re gonna get. The troubles that come to us could be worse than what Volcker was dealing with. And harder to fix.
Think of all the Latin American countries that print too much money, they get strongmen and so forth. That’s what Plato said happened in the early Greek city state democracies. One person one vote a lot of egality and you get demagogues and the demagogues level out the population and pretty soon you don’t have your democracy anymore. I don’t think that was a crazy idea on Plato’s part. I think that accurately described what happened in Greece way back then. And it’s happened again and again in Latin America, we don’t want to go there. At least I don’t.
We’ve done something pretty extreme. And we don’t know how bad the troubles will be. Whether we’re going to be like Japan or something a lot worse. What makes life interesting is we don’t know how it’s going to work out. I think we do know we’re flirting with serious trouble. I think we also know that some of our earlier fears were overblown. Japan is still existing as a civilized nation. In spite of unbelievable excess by all former standards in terms of money printing. Think about how seductive it is. You have a bunch of interest-bearing debts, and you pay them off with checking accounts, which are no longer paying interest. Think about how seductive that is for a bunch of legislators. You get rid of the interest payments and the money supply goes up. Seems like heaven. And of course when things get that seductive, they’re like to be overused.
Do you think it’s likely we’ll experience a major increase in interest rates in the upcoming decades? Like in the period between 1950-1980?:
Very intelligent and difficult question. When you print money on the scale that modern nations are printing it. Japan, US, Europe, etc. We’re getting into new territory in terms of size. Japan bought back a lot of their own debt but a lot of their common stocks. So the federal reserve system, you can’t imagine how much money printing Japan has done, and they haven’t had all that much inflation, and it’s still a very admirable civilization. In fact, you could argue that Japan is one of the more admirable civilizations in the whole world.
In spite of all this very extreme government money printing they’ve done, they haven’t had terrible consequences. They’ve had 25 years of stasis with living standards not improving very much. I don’t think that came from their macroeconomic policies. I think that came from the rise of tough competition, for there are export powerhouse from China to Korea. But at any rate it’s weird what’s happening and nobody knows for sure how it’s going to work out.
I think it’s encouraging that Japan can print as much money as it has, and remain as civilized and calm. And admirable as it has. I hope to God the US has a similar, happy outcome. But I think the Japanese are better adapted for stasis than we are. I think it’s a duty-filled civilized bunch of people, a lot of them older, not many young people. And they just suck it in and cope.
In our country we have terrible tensions, it’s way harder to run a country which is not mono-ethnic like Japan. There’s some professor at Harvard that’s written extensively on this subject. It’s way harder to run a nation like the US, with different ethnicities and groups than it is to run Japan. Japan is basically a mono-ethnic civilization which is proud of its ethnicity and of course they can cope with troubles better than some other people can. But we don’t know where we’re going. There’s never been anything quite like what we’re doing now. And we do know from what’s happened in other nations. If you try and print too much money, you’d eventually cause this terrible trouble. We’re closer to terrible trouble than we’ve been in the past. But it may still be a long way off. I certainly hope so.
Charlie on questions about what to do with all of our serious problems of national debt and a demographic storm driving deficits higher:
Because all those problems are real, and so tempting to get rid of debt by just giving guy a non-interest bearing account. Not only do we have serious problem but solution to it, the easiest for politicians and federal reserve is just print more money, and solve the temporary problems that way. That of course long term dangers. We know what happened in Germany when the Weimar just kept printing, whole thing blew up. All this stuff is dangerous and serious. Don’t want to have a bunch of politicians whatever is easy, on theory didn’t hurt us last time, so we can double and do it one more time. We know what happens on everlasting doubling doubling, you will have a very different government if you keep doing that enough. So you’re flirting with danger somewhere unless there’s some discipline in the process. But I don’t regard japan in some terrible danger. They’ve done a huge amount of this and gotten by, I don’t think we’ll be as good at handling our problems as Japan is.
Charlie answering what happens after Quantitative Easing ends?
In the US we have a hugely strong economy and technical civilization which is not going away. You wouldn’t believe what a modern factory looks like when you fill it with robots, that’s coming more and more. It does create adjustment problems. You have a problem too and you solve that by dying, a lot of people don’t like that solution, I don’t much care for it myself.
Charlie on why Berkshire is not buying more companies and stocks:
The reason we’re not buying is can’t buy anything at prices we’re willing to pay. It’s just that simple. And a lot of the buying is not by people who really plan to own them. A lot of it is fee driven buying. private equity buys things can have more fees by having more things under management. Of course it’s a lot easier buy something when you use somebody else’s money. We’re using our own money, or at least that’s the way we think of it. So we’re not. By the way, it’s not a tragedy that Berkshire has some surplus money they’re not investing. You can argue that the lil old DJCO what a good it was we had $30 million extra coming in from a foreclosure boom, and that we invested it shrewdly. It gives us a lot of flexibility.
And btw that piled up money helps us in moving these governmental bodies we’re selling the software to. We look more responsible with the extra wealth. And we are more responsible with the extra wealth. But if the shareholders who are worried about the future because it looks complicated and difficult. I want to say to them what my old torch professor said to me. Charlie tell me what your problem is and I’ll try and make it more difficult for you. And he did me a favor by treating me that way. And I’m just repeating his favor to you. When you’re thinking the thoughts, at least you’re thinking in the right direction, you’re worried about the right things, all you people that are worried about inflation and the future of the republic and so forth.
Charlie on the prospects of Daily Journal’s software business are especially interesting now:
The courts of the world have been in the stone age. No reason why lawyers go down heavy traffic, should all be done in zoom. Filing electronically. Huge market for the automation for courts, and it’s early. That’s the good news it’s a big market. Bad news is slow damn tough way to grind ahead in software because it’s very bureaucratic, RFP, government bodies. It’s a huge market and intrinsically very slow to get done. That’s the good news and bad news. There isn’t any doubt of what’s going to happen, the courts are going to get more efficient and get with the modern world.
Charlie on why Berkshire and the Daily Journal were able to survive and thrive while big bureaucracies have failed:
If you look at Berkshire and Daily Journal, Charlie age 98, Jerry age 83, enormous delegations of power to Jerry Salzman. Berkshire Hathaway’s system of managing subsidiaries is just short of abdication, and look at how well it’s worked.
Most newspapers are going out of business. At Daily Journal we have no directors fee, no president fees, no expenses no nothing. Jerry’s been a miracle wearing 5-6 hats doing everything, at very little cost. Berkshire has 30 people at headquarters who aren’t internal auditors. Look how well it’s done. It’s hard to run a bureaucracy that doesn’t get terrible slowness and terrible waste.
Think of the big bureaucracies that have died: US Steel, Eastman Kodak, Federated Department Stores, Sears Roebuck. Yet some things have come through and survived. In some cases the whole business had to die, and they had take capital out, and we owned new businesses just to survive, that’s what Berkshire did. Look at the 3 companies that Berkshire had, they all went out of business. And yet we wrung enough money of them before they died, that Berkshire now has more audited net worth on its balance sheet than any other corporation in the United States. Now that’s weird.
And we don’t have this bureaucracy that other places have. There isn’t anybody at headquarters to be bureaucratic, just a handful of people are running an empire. And I don’t think there’s any chance that the rest of the world is going to be like Berkshire.
I think we were kind of a fluke that lasted for a while. And the Daily Journal is a mini Berkshire. What are the chances that a little fleabit newspaper in Los Angeles would be as prosperous as it is. After all this trouble that is making all the other newspapers go broke. By the way we’re going to miss these newspapers terribly.
Nowadays every director in a big company gets $300,000 a year. And everyone thinks they’ve arranged this wonderful independence. A man who needs $300,000 extra a year as a director is not an independent. The one thing you can guarantee is that he’s try to stay a director. I don’t think that’s an ideal system.
The excess just creeps in to these places. And of course it isn’t good. But you wouldn’t want a rule that nobody could ever could go to some over-manned place and cut out of a lot of the fat.
The directors table in the Heinz corporation costs $600,000. The goddamn directors table. The directors table in Costco costs about $300.
Charlie on people working from home (WFH) and he lamented the end of the World Book Encyclopedia:
Pandemic has given us an awful lot of people who’ve gotten used to not being in the office at five days a week. So I think some of these changes are here forever.
One of the investments that nobody ever talks about at Berkshire is World Book Encyclopedia. Berkshire made $50 million a year pre-tax out of that business for years and years. And I was always so proud of it because I grew up with it and it helped me. And of course I liked the $50 million a year. And then a man named Bill Gates came along and decided he was going to give away a free encyclopedia with every damn bit of software in his personal computer software. And away went our $50 million a year. But now it’s pretty well gone away in terms of its worldly significance. And the money went with it.
That’s just the way capitalism works. It has destruction. And some of the things you lose you’re really gonna to miss. And you’re not going to replace them. I don’t think these TV programs that charm our children are as good as the World Book was for them. World Book helped me get ahead in life. And the people who aren’t going to read World Book and who are hanging in front of the TV set — they’re not blessed, they’re cursed. Now there are advantages too to their having a television. By the way I’m not weeping any tears that I don’t have my World Book anymore I’ve adjusted. I miss it.
If you’re interested in learning how to take control of your finances and start becoming an investor like Warren Buffett, check out my free PDF guide.
I look forward to making more investor friends! Add me on Instagram: michellemarki