Collection: Warren Buffett - #150 'Deflation'


Video Link: https://youtu.be/vB-Kiwoaoc0


In this episode, Warren Buffett was asked on the threat of deflation and if it were to occur, what its likely impact would be on the economy, Berkshire Hathaway, and personal investment decisions?



In this episode, you’ll learn:

  • What deflation means?

  • How will deflation affect long term bonds?

To check out all Collection: Warren Buffett <click here>

[Transcript]

(Source: https://buffett.cnbc.com/video/1999/05/03/morning-session---1999-berkshire-hathaway-annual-meeting.html)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

AUDIENCE MEMBER 00:08

Steve Cohn (PH) from Peoria, Illinois.


First of all, I just had my first Dilly Bar a half an hour ago, and thank you for introducing me to that.


WARREN BUFFETT 00:16

Good. I’ll sell you a second, too if — (Laughter)


AUDIENCE MEMBER 00:21

You spoke earlier about the threat of change. Can you comment on the threat of deflation and, if it were to occur, what its likely impact would be on the economy, Berkshire Hathaway, and personal investment decisions?


WARREN BUFFETT 00:35

Well now, displacement in what respect? I didn’t —


AUDIENCE MEMBER 00:37

-flation.


WARREN BUFFETT 00:38

Oh, inflation.


AUDIENCE MEMBER and CHARLIE MUNGER 00:39

Deflation.


WARREN BUFFETT 00:40

Oh, deflation.


CHARLIE MUNGER 00:40

Deflation.


WARREN BUFFETT 00:41

Oh, I’m over — I’m getting there. (Laughter)


Well I think it’s very, very unlikely, but I would — I have been wrong consistently now for a decade or more about the degree to which inflation has at least been tamed for that period.


I would have expected — if you’d showed me all the other things that were going to happen in the world in the last — if I’d seen that ahead of time 10 or 15 years ago — I would have thought we would have had more inflation, so —


I have trouble envisioning a world of — where the U.S. experiences deflation. But, you know, my record is not great on that.


And again, we don’t — we do not spend a lot of time thinking about macro factors.


I mean, if you ran into deflation that means, you know, capital is appreciating, so you need much lower nominal rates of return on capital to be in the same place under deflation as would be the case if you had inflationary conditions.


So deflation, everything being equal — and it isn’t equal — is good for investors because it — you know, the value of money appreciates. The buying power of money appreciates. But it would have other consequences, too.


I don’t think it’s likely. I’m not — I have no great record at all in macro forecasting and I — if it does happen, the truth is, I don’t know what the effects would be.


Charlie.


CHARLIE MUNGER 02:15

Well, you’ve seen what deflation is doing in Japan, and it’s been quite unpleasant for the people there. On the other hand, it hasn’t been a catastrophe. I mean, nothing like the ’30s in the United States.


WARREN BUFFETT 02:29

No, and actually, in Japan, if you had owned long bonds, you would have had a tremendous bonanza from deflation, because your — the value of your bonds would have gone up dramatically as interest rates came down. And then that money, in turn, would buy more.


So it would — it was a very — if you happened to be the person that owned longer bonds issued at higher coupons some years back, that’s worked to your advantage.


But — and presumably that would work in this country. If we actually ran into consistent deflation, my guess is that people who owned long bonds, even bought at 5 1/2 percent, would find their position in the world dramatically improved compared to people who owned most other asset classes.


Zone 2.

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