The Oracle of Omaha

Warren Buffett, one of the world's greatest investors, conducted his annual Berkshire Hathaway shareholder meeting for 35,000 attendees in Omaha's Qwest Center last weekend. When Buffett speaks, markets listen.

Buffett's Berkshire Hathaway, originally a textile manufacturing company, owns investments in many big name companies, including a 20.4 percent stake in Moody's Investment Service, which publishes credit ratings and other investment information. When asked why Berkshire didn't put more pressure on Moody's for giving triple-A ratings to mortgage securities that lost a lot of value, The Wall Street Journal reports that Buffett replied, "Basically, four or five years ago, virtually everybody in the country had this model in their heads, formal or otherwise, that house prices could not fall significantly. . . . "[I]t was stupidity and the fact that everyone else was doing it."

This is a remarkable admission by Buffett, known as the "Oracle of Omaha," who understands how market bubbles, like the housing bubble and the earlier dot-com bubble are created. The root cause is the Federal Reserve creating too much money out of thin air and pumping it into the economy. Yes, I said thin air. In the past, the federal government redeemed the dollar for something of value---gold. FDR domestically in 1933 and Nixon internationally in 1971 put an end to that practice. Today the Fed creates money as it sees fit without the restriction of gold. When the Fed creates more dollars, dollars already in existence eventually fall in value. This is called "inflation." When dollars fall in value, businesses generally require more of them from buyers to purchase their products.

The U.S. dollar is a problem for the entire world, because many of the world's currencies are based on the Fed's house of cards. Where does Buffett think the world is heading? In his annual letter to shareholders, he writes, "In poker terms, the Treasury and Fed have gone 'all in.' Economic medicine that was previously meted out by the cupful (pumping dollars into the economy) has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation."

How much inflation? The double-digit rates of the late 1970s and the early 1980s could look like the good ol' days. Regarding the economy in general, Buffett, who supports the federal government's recent massive injection of dollars into the economy to stave off "cataclysmic" consequences, writes in his shareholder letter, "We're certain, for example, that the economy will be in shambles throughout 2009---and, for that matter, probably well beyond---but that conclusion does not tell us whether the stock market will rise or fall."

So what can we do? Congress created the Federal Reserve in 1913 under President Woodrow Wilson. We can put pressure on Congress to rein in the Fed---something Congress loathes to do for fear of politicizing the nation's bank. But first Congress must rein in itself. The Fed prints massive amounts of money due in large part to pay for our deficits, which President Obama and Congress are ballooning to a projected 1.7 trillion dollars in 2009.

We have an obligation to the world to use honest scales and honest weights. The Oracle of Omaha is a "value investor." I think he'd agree.