Watching Warren Buffett completely change what he believes about money in a matter of months has been fascinating.
He is considered the most successful investor in history, so heโs worth listening to when financial markets enter a strange period that nobody understands or can properly explain (even if, like me, you donโt love everything he says).
These two lines from Warren made me think:
โThe [US] debt isnโt going to be repaid; itโs going to be refunded.โ
โYou better own something other than debt.โ
Buffett explains that when the government can just keep on printing money to pay their own debt itโs laughable to think they will ever default. He says, โThe trick [for countries] is to keep borrowing in your own currency.โ
So if money will keep being printed out of thin air then what does that mean for your investments, assets and savings? Letโs explore the topic in simplistic terms and see what you can do about it.
The Most Important Lesson On How Money Works From Warren Buffett
This is what Warren said recently about how money works that will test everything you thought you knew about money:
If the world turns into a world where you [governments] can issue more and more money and have negative interest rates over time โ Iโd have to see it to believe it, but Iโve seen a little bit of it. Iโve been surprised. Iโve been wrong so far.
If you can have negative interest rates and pour out money, and incur more and more debt relative to productive capacity, youโd think the world would have discovered it in the first couple of thousand years rather than just coming on it now. We will see.
Itโs probably the most interesting question Iโve ever seen in economics.
Can you keep doing what weโre doing now? The world has been able to do it for now a dozen years or so [since 2008]. We may be facing a period where weโre testing that hypothesis that you can continue it with a lot more force than weโve tested it before.
This description from Warren about all the free money weโve all been getting access to because of a health crisis may explain why Warren has sold a lot of his US bank stocks recently.
The influential finance blog Zero Hedge wrote recently that Warren โappears to now be quietly betting against the United States,โ because โthe famously anti-gold investor has abandoned banks โ the backbone of Americaโs credit-driven economy โ in favor of a gold miner.โ
A friend said this to me the other day: โWatch what the billionaires do, not what they say.โ If Warrenโs actions are anything to go by then the record prices in the stock market are something to be very cautious of.
Inflation Is Taking Hold
Inflation is when prices go up and the value of your money decreases. Four dollars last year may have got you a small cup of coffee. That same cup of coffee might cost you $5 this year, as a simple example.
Inflation is a hidden tax on your money.
Warren says, โIโve been wrong in thinking you could have the developments youโve had without inflation taking hold.โ
Warren has put his firmโs money in gold, and treasury bills which he describes as โa terrible investment over time.โ (A treasury bill is an investment where you are essentially lending money to the government.)
So Warren is comfortable putting his money in terrible investments in the short-term because of what he can see in the world of finance. That decision is worth contemplating when thinking about your own money and investments.
Why All of This Matters to You?
Weโve talked a lot of finance shop in this article. Letโs break down why the change in how money now works matters to you.
Negative interest rates
Negative interest rates can be bad for you because it means you have to pay to store your money. It also means the bank you choose to bank with may face severe financial trouble that leads them to go out of business.
Yes, banks have insurance in case of such an event, but if the problem is too big then that deposit insurance is useless โ many people do not understand this. They assume the government or a magic insurance policy will save them without any negative consequences.
Weโre in uncharted territory and I would not be relying on anybody to come and save you and your money.
The poor are being robbed by the rich who have the data to predict their moves.
Many retail investors are buying stocks using apps like Robinhood โ the data tells us this trend.
While billionaires like Warren are exiting stocks and running to safety, everyday people seem to believe they are smarter than the pros โ or the high-frequency, non-human trading bots who predict the moves of the retail investor and bet against them.
Investments firms use high-frequency trading to automate their investment decisions and beat the average investor. These same firms are front-running retail Robinhood investors. What does this mean in simple terms?
Sophisticated investment firms, according to Bloomberg, are getting access to data that tells them what the retail investors (dumb money as itโs known in finance) are doing so they can take advantage of them.
This data allows investment firms to rob the poor and pay the rich โ the name of the Robinhood app is kind of ironic, isnโt it?
The stock market bubble
Record unemployment. A global health crisis. Protests. Despite the world we live in stock markets are beating record highs. Crazy, or a disaster waiting to happen?
Another iconic billionaire investor, George Soros, called the stock market a bubble. โInvestors are in a bubble fueled by Fed liquidity,โ he says and thatโs why he โno longer participates.โ
Either everything is fine with markets and businesses havenโt been affected by the health crisis at all, or weโre watching a bubble thatโs about to pop. I donโt have the answer so thatโs why Iโm sitting on the sidelines.
The change in the velocity of money
While free money is being given away through economic stimulus and large amounts of money are being printed out of thin air, the velocity of money is down. (The velocity of money just means how many times one dollar passes through multiple peopleโs hands.)
When large amounts of money are created out of thin air and that currency is not spent, when that money eventually is spent, it can lead to larger than normal amounts of inflation that devalue the money youโve worked hard for.
Example of decrease in the velocity of money:
Example of the extra money being printed out of thin air:
Takeaway
The way money works and functions in society has fundamentally changed. It has got some of the greatest investment minds like Warren Buffett and George Soros challenged, too. They have run to safety as a result.
What you can do about the change in how money works is this: be cautious in the short-term with your money and investing in assets.
The other critical learning you can take away from Warren is to spend some time understanding these financial concepts via a website like Investopedia:
- Money Printing
- M1 and M2 money supply
- The Velocity of Money
- Stock market bubbles (Tech Stocks Bubble in 2000)
- Inflation vs. Deflation
- Bailouts vs. Bail-ins โ in the event of a financial crisis
If you understand these basics of how money works you can protect yourself and everything youโve worked for. Now is not a time to panic. Now is a time to learn and prosper from what is transpiring in the global economy.
The value of the money you have is changing. The word debt and what it means is changing. Watch what the billionaire investors are doing because they tell you a lot of what you need to know.
You decide whether you donate your money to a trading app, watch it devalue because of inflation, or invest with a big safety net and act like a pro.
About the Author
This submitted article was written by Tim Denning, an Australian blogger, writer for CNBC and Business Insider. Inspiring the world through Personal Development and Entrepreneurship.ย See more: www.timdenning.com