Buffett on the Dollar and Gold

http://www.futureofcapitalism.com/2012/02/buffett-on-the-dollar-and-gold

Fortune has an advance excerpt of Warren Buffett's annual shareholder letter. Mr. Buffett makes some interesting points about the dollar:

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as "income."

For taxpaying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor's visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It's noteworthy that the implicit inflation "tax" was more than triple the explicit income tax that our investor probably thought of as his main burden. "In God We Trust" may be imprinted on our currency, but the hand that activates our government's printing press has been all too human.

He's skeptical about gold as an alternative. He doesn't explain on what basis he defines that 86% decline in value. My guess is he's using the government's own consumer price index rather than gold as the definition.

by Editor  |  Feb 9, 2012 at 9:51 am Related Topics:  Federal Reserve, Warren Buffett receive the latest by email: subscribe to the free futureofcapitalism.com mailing list