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Collection: Charlie Munger - #206 'Munger's Thoughts on Money Printing, Inflation and Its Solution'



His question is, do you think it’s likely that we will experience a major increase in interest rates in the upcoming decades? Like, for example, in the period between 1950 and 1980?


Well that, of course, is a very intelligent question and a very difficult question.

When you throw money – when you print money on the scale that modern nations are printing it — Japan, United States, Europe, etc. — we’re getting into new territory in terms of size. The Japanese bought back not only 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. They haven’t had all that much inflation and they – 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. And in spite of all this very extreme government money printing they’ve done, they haven’t had terrible consequences.

Now, 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 their export powerhouse from China and Korea. But at any rate, it’s weird what’s happening, and nobody knows for sure how it’s gonna work out.

I think it’s encouraging that Japan can print as much money as it has and remain as civilized and calm and as admirable as it has. And so I hope to God the United States 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 has written extensively on this subject. It’s way harder to run a nation like the United States — with different ethnicities, groups, and so forth — than it is to run Japan.

Japan is basically sort of 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 are going.

(Inaudible) There’s never anything quite like what we’re doing now. We do know from what’s happened in other nations that if you try to print too much money, it eventually causes terrible trouble. We are closer to terrible trouble than we’ve been in the past but it may still be a long way off. I certainly hope so.


Me too.

Steve Kospel writes in on this same subject, he says, "what are your current thoughts on the inflationary environment? Please compare and contrast it to the 1970s."


Well, when we – When [Paul] Volcker, after the 1970s took the prime rate to 20% and the government was paying 15% on US government bonds, that was a horrible recession. Lasted a long time, caused a lot of agony. And 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. And I think in 2020 hindsight, it was a good thing that he did it. I would not predict that our modern politicians will be as willing to permit a new Volcker to get that tough with the economy and bring on that kind of 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.


Like what?


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 democracy. One person, one vote, a lot of legalities, and you get demagogues, and the demagogues lather of 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 describes what happened in Greece way back then. And it’s happening again and again in Latin America. We don’t want to go there. At least I don’t.


Me either.

From Simon Jacobs who says, "conventional economic theory argues that excessive monetary and fiscal stimulus over the last two years has triggered the highest inflation in 40 years. Do you broadly agree with this thesis? And more importantly, do you think there will be a high economic price to pay as the Fed attempts to bring inflation back under control?"

I guess the reasons for it –


Well, the first part I agree with. We’ve done something pretty extreme. And we don’t know how bad the troubles will be — whether it’ll gonna be like Japan or something a lot worse. And what makes life interesting is that we don’t know how it’s gonna work out.

I think we do know we’re flirting with serious trouble. And 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 of how seductive it is. You have a bunch of interest-bearing debts and you pay them off with checking accounts on which you’re no longer paying interest.

Think of 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 likely to be overused.


Steven Tetter from Atlanta writes in, he had similar concerns about inflation but he takes it a step further, he says, "how will this all play out? And what’s the best advice you have for individual investors to optimally deal with the negative impact of inflation other than owning quality equities?"


Well, it may be that you have to choose the least bad of your a bunch of options. That frequently happens in human decision making.

The Mungers have Berkshire stock, Costco stock, Chinese stocks through Li Lu, a little bit of Daily Journal stock, and a bunch of apartment houses. Do I think that’s perfect? No. Do I think it’s okay? Yes.

I think the great lesson from the Mungers is that you don’t need all this damn diversification. That's plenty of – you’re lucky if you got four good assets. I think the finance professors and the [people] that sell the idea that perfect diversification is professional investment.

If you’re trying to do better than average, you’re lucky if you have four things to buy. And to ask for 20 is really asking for egg in your beer. It's – (Laughter) Very few people have enough brains to get 20 good investments. (Laughter)


[YAPSS Takeaway]

The worst thing to do during inflationary environment is being ignorant and not doing anything.

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