Friday, May 6, 2022

Warren Buffett Endorses MMT, and Explains Why Bitcoin Isn't Money and Not Worth Anything

Image source: CNBC

I was in Omaha this past weekend for the annual “Woodstock for Capitalism” i.e. the Berkshire Hathaway annual shareholder’s meeting, the first in-person meeting since the onset of the COVID-19 pandemic.

The weekend was filled with a mix of emotions and takeaways. While there was certainly a lot of “pent-up demand” for a return by the Berkshire faithful, one couldn’t help but also feel a little nostalgic. Buffett and his right-hand man Charlie Munger are approaching a combined 190 years of age. The fact that they still have the energy and mental acuity to operate at the level they do is astounding. Nevertheless, it was clear their communications skills have deteriorated somewhat. Buffett used a lot more “ah’s” when he spoke, and at times tended to ramble. It’s possible that is also a function of the last two years - it’s been a while since the old man spoke in front of a 25,000+ live audience! I think it’s safe to say we all have been more insulated over the past couple years than normal. At times, all I’ve wanted is to just talk about all the crazy stuff that’s been happening. Naturally, of course, I started a blog instead!

One point of emphasis that Buffett clearly had on his agenda for the meeting was to explain to everyone what money is. This shouldn’t come as a surprise after being called a “sociopathic grandpa” and Bitcoin’s “enemy no. 1” by Peter Thiel at a conference in Miami a few weeks ago. Thiel referred to Bitcoin as a “movement” and called not buying Bitcoin a “deeply political” choice. There’s a lot to unpack there but I’ll just say this: if your investment thesis relies on a successful political revolution that undermines the legitimacy of the most dominant nation in the world that has created immense wealth for its citizens and has the most powerful military in history by orders of magnitude, you may want to reconsider.

Returning to the subject at hand, Buffett led the meeting off with a clarification on money. While projecting a $20 bill on the screen, he remarked the following [emphasis added throughout]:

"This note is legal tender for all debts public and private, and that's what makes it money. Money is the only thing that the IRS is going to take from you. You can offer them all kinds of things, but this is what settles debts in the United States. You'll hear a lot about various kinds of money, but this is the only kind of money you're going to see throughout your lifetime." 

This is precisely what MMT has been preaching for nearly three decades: taxes drive money! Money (cash) and debt are one in the same; every financial asset has an offsetting and equal liability. Sort of like Newton's Third Law of Physics, i.e. every action has an equal and opposite reaction. And if they are equal, that means they can cancel each other out. Money is used to cancel debt, and taxes are a form of debt. Therefore, if the State levies a tax charge payable exclusively in its own currency, then that creates demand for the currency.

Buffett was keen to emphasize the $20 bill's "legal tender" status. A fantastic historical account of the origins of "legal tender" laws in the US can be found in Roger Lowenstein's fantastic new release Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War. Consider the following passage from that book, which refers to what became known as "greenbacks," an early form of government fiat money which was issued by the US Treasury in order to fund the Civil War:

"the legal tender notes would constitute a 'debt.' True, they bore no interest, and carried no maturity; nonetheless, it was widely assumed that, after the war, they would be redeemed for gold. Today, people think of 'money' as having inherent value. In 1862, even proponents of legal tender thought of the paper as provisional, casting a debt up on the future."

Today, we use the term dollar bills but they are technically Federal Reserve notes. Note the nomenclature, as we use the same terms in reference to debt issued by the US Treasury (T-bills, Treasury Notes, Treasury Bonds). Indeed, the dollar bills in your pocket are essentially zero-interest, perpetual, non-callable debt issued by the Fed. They are essentially a tax credit created by the government in order to fund productive work. 

Of course, this is not the first time Buffett has been linked to MMT. He is quoted in Stephanie Kelton's The Deficit Myth with the following:

"[the US] cannot have a debt crisis of any kind as long as we keep issuing our notes in our own currency...Greece lost the power to print their money. If they could print drachmas, they would have other problems, but they would not have a debt problem."

Buffett does not subscribe to, nor does he endorse, MMT by name. But he absolutely does so in principle.

Buffett also brought up the notion of a "value." He has mocked so-called "goldbugs" for their obsession with the "barbarous relic." He took it easy on that crowd this year and instead turned his attention to Bitcoin, using similar arguments. He claimed that Bitcoin isn't worth anything because it doesn't produce anything, as opposed to other assets such as farmland or apartment buildings. However, he also made the following comment on art, too:

"Certain things have value that don't produce something tangible. I mean you can say a great painting will probably have some value 500 years from now."

He then goes on to say that if people find it interesting, they will pay someone else money to see it. This is an important point. If a piece of art leaves a strong enough impression on people, they will pay to have that experience. Taking this a step further, the world will need to spend incomprehensible amounts of money in order for Bitcoin to be around 500 years from now. This is because it relies on a network made up of physical computers that degrade over time. That's not a prediction, that is just physics. Depreciation is a real cost. There are actual physical cables running on the oceans' floors that physically link together countries in order for them to be on the same internet network. Undoubtedly those will wear out.

Not only that, but do you really think your thumb drive that holds the keys to your Bitcoin won't degrade at all, and will function properly, in 500 years? That is before considering the fact that technology tends to evolve, and computers will still be around in 500 years with thumb drive inputs. A single piece of art is easy enough to store for 500 years; the Mona Lisa was painted in 1503! And gold itself has natural properties where, for all intents and purposes, it doesn't degrade. That characteristic made it a useful money technology in the past, but the world's population grew so large that the supply of gold couldn't support a global monetary system. The fact that gold doesn't degrade means it is basically the exact opposite of Bitcoin, despite the comparisons between the two. Eventually, all of today's Bitcoin holders will die. I'm sure many will take their passwords with them, meaning there will be fewer and fewer Bitcoins available, and the network will cease to exist. By contrast, for someone who owns gold, it doesn't necessarily all disappear when they die.

Some Bitcoin and crypto fanatics seem to think that rising price for a currency is an overwhelmingly positive development. It's not. Consider a farmer who borrows Bitcoin to pay for property, equipment, and supplies he or she needs to cultivate crops to help feed the country. If they borrow in Bitcoin, and in the time between planting and harvesting/selling their crops the price of Bitcoin increases by 4x, well now the sales they generate will be one quarter of what they had originally planned with they took out the loan. They won't be able to pay back their debt if they can't generate sufficient revenues to do so, so they are forced to default on their loan and file for bankruptcy protection. If all the farmers went bust all at once, it would cause mass starvation and famine. But hey, at least the Bitcoin HODLers saw their price go up!

Like Buffett says, investors should stick to assets that produce something useful. This is likewise very MMT-like, which emphasizes that people should focus on real resources rather than made up financial ones. It's easy to forget that the companies that Buffett has so successfully invested in have produced incredible amounts of goods and services for the citizens of America for decades. And while the near-term benefit of things like gold and art don't necessarily produce something in the immediate, the cost of keeping those assets in-tact is tiny compared to Bitcoin.

Finally, when asked about the best way to fight against inflation, Buffett gave an amazing response: become exceptionally good at something!

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