Uncle Warren’s Inflation Warning

Warren Buffett recently published his latest letter to shareholders of Berkshire Hathaway and, if you haven’t done so already, I encourage to go read it along with all 45 that preceded it, from 1977 to 2022. They are a wealth of investment knowledge and business wisdom you won’t find anywhere else. What’s more they are available for free to anyone with the will to simply sit down and soak them all in.

In this latest letter, Mr. Buffett briefly addressed the topic of stock buybacks and that was what the media and investors really glommed onto. What I found far more interesting, however, was a section that followed titled, “Some Surprising Facts About Federal Taxes.” Below is a particularly poignant passage (emphasis mine):

During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion. Though economists, politicians and many of the public have opinions about the consequences of that huge imbalance, Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless. Our job is to manage Berkshire’s operations and finances in a manner that will achieve an acceptable result over time and that will preserve the company’s unmatched staying power when financial panics or severe worldwide recessions occur. Berkshire also offers some modest protection from runaway inflation, but this attribute is far from perfect. Huge and entrenched fiscal deficits have consequences.

It’s those last two sentences that really grabbed my attention. Buffett knows that his letter is read not only by shareholders but by a much wider audience focused on areas both within and without the markets. For this reason, he is hyper-conscious of the topics he addresses and the words he chooses to use in doing so. Thus for him to use a phrase like “runaway inflation” in the context of “huge and entrenched fiscal deficits” represents a clear warning to both investors and politicians alike.

Over three years ago, just before today’s inflation problem began, Buffett and his partner Charlie Munger warned that the combination of large fiscal deficits paired with massive money printing could lead to a situation where, in Munger’s characteristically blunt words, “you end up with something like Venezuela.” Obviously, these concerns have not been allayed by the fact that the deficit has only grown far wider since while the Fed has stayed determinedly behind the curve of the biggest inflation problem in decades.

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