What I Learned from My Dad

When his youngest son decided to become a musician, Buffett offered moral but not financial support

One of my father's often-quoted tenets is that a parent, if he has the means to do so, should give his children "enough to do anything, but not enough to do nothing." A head start is fine; a free pass is often a crippling disservice. When I turned 19, I received my inheritance—proceeds from the sale of a farm, which my father converted into Berkshire Hathaway (BRK.A) stock. At the time I received them, the shares were worth roughly $90,000. It was understood that I should expect nothing more.

So—what to do with the money? I was a student at Stanford University; there were no strings attached. Fortunately, I'd had the advantage of seeing my older siblings burn through most of their cash; I didn't want to follow down that path. At the other extreme, I might have done absolutely nothing with that stock—just left it in an account and forgotten about it. If I'd picked that option, my shares would now be worth around $72 million. But I didn't make that choice, and I don't regret it for a second. People think I'm either lying or crazy when I say this, but it happens to be true, because I used my nest egg to buy something more valuable than money: I used it to buy time.

My inheritance came to me around the time I was finally committing to the pursuit of a career in music. As a pragmatic Midwesterner with a very limited nest egg, I knew that I would have to find a way to turn my creative impulses into a livelihood. But how did one do that? How would I find an audience, or clients, or a way to sell what I'd written and produced? I didn't have a clue, but it was becoming clear to me that I wasn't going to figure it out by staying in a university.

I decided to leave Stanford and use my inheritance to buy the time it would take to figure out if I could make a go of it in music.

With help from my father, I worked out a budget that would allow me to conserve my capital as long as possible. I moved to San Francisco, where I lived very frugally—small apartment, funky car. My sole extravagance was in expanding my recording equipment. I played the piano, wrote tunes, experimented with electronic sounds. Then I put a classified ad in the San Francisco Chronicle, offering to record all comers in my studio.

And I waited until a very important bit of good luck tracked me down one day in 1981, as I stood at a San Francisco curbside washing my crummy old car. A neighbor with whom I'd had nothing more than a nodding acquaintance happened by and asked what I did for a living. When I told him I was a struggling composer, he suggested I get in touch with his son-in-law, an animator who was always in need of music. I followed up, and the son-in-law did have work for me. He'd been commissioned to create 10-second "intersticials"—quick ads meant to flash a logo and establish a brand ID for a newly conceived cable channel.

I took the work. And the cable channel more than launched; it rocketed to the moon. It was called MTV. Soon many TV outlets wanted to look and sound like MTV. I no longer had to take on unpaid work.

My inheritance was relatively modest, but it was more than most young people receive to get a start in life. Having that money was a privilege, a gift I had not earned. If I'd faced the necessity of making a living from day one, I would not have been able to follow the path I chose.

Would my father have helped me get started if I'd chosen a career on Wall Street? I'm sure he would have. Would he have given me a job at Berkshire Hathaway if I'd asked for one? I suppose so. But in either of those cases, the onus would have been on me to demonstrate that I felt a true vocation for those fields, rather than simply taking the course of least resistance. My father would not have served as an enabler of my taking the easy way out. That would not have been an exercise of privilege, but of diminishment.

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Adapted from Life Is What You Make It by Peter Buffett, © 2010 Peter Buffett. Reprinted by permission of Harmony Books, an imprint of the Crown Publishing Group. 

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See more links on Worren Buffett:

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2. Buffett's winners and losers

 3. Warren Buffett Is No Steve Jobs

4. A Lesson From Warren Buffett: 

5. Buffett: Bailouts not just for CEOs

How Safe Are Your Dollars?

CAMBRIDGE – Chinese officials and private investors around the world have been worrying aloud about whether their dollar investments are safe. Since the Chinese government holds a large part of its $2 trillion of foreign exchange in dollars, they have good reason to focus on the future value of the greenback. And investors with smaller dollar holdings, who can shift to other currencies much more easily than the Chinese, are right to ask themselves whether they should be diversifying into non-dollar assets – or even shunning the dollar completely.

The fear about the dollar’s future is driven by several different but related concerns. Will the value of the dollar continue its long-term downward trend relative to other currencies? Will the enormous rise of United States government debt that is projected for the coming decade and beyond lead to inflation or even to default? Will the explosive growth of commercial banks’ excess reserves cause rapid inflation as the economy recovers?

But, while there is much to worry about, the bottom line is that these fears are exaggerated. Let’s start with the most likely of the negative developments: a falling exchange rate relative to other currencies. Even after the dollar’s recent rally relative to the euro, the trade-weighted value of the dollar is now 15% lower against a broad basket of major currencies than it was a decade ago, and 30% lower than it was 25 years ago.

Although occasional bouts of nervousness in global financial markets cause the dollar to rise, I expect that the dollar will continue to fall relative to the euro, the Japanese yen, and even the Chinese yuan. That decline in the dollar exchange rate is necessary to shrink the very large trade deficit that the US has with the rest of the world.

Consider what a decline of the dollar relative to the yuan would mean for the Chinese. If the Chinese now hold $1 trillion in their official portfolios, a 10% rise in the yuan-dollar exchange rate would lower the yuan value of those holdings by 10%. That is a big accounting loss, but it doesn’t change the value of the American goods or property investments in the US that the Chinese could buy with their trillion dollars.

The Chinese (or Saudis or Indians or others outside the euro zone) should, of course, be concerned about the dollar’s decline relative to the euro. After all, when that decline resumes, their dollar holdings will buy less in European markets. While it is hard to say how much the decline might be, it would not be surprising to see a fall of 20% over the next several years from the current level of about 1.4 dollars per euro.

But the big risk to any investor is the possibility that inflation will virtually annihilate a currency’s value. That happened in a number of countries in the 1970’s and 1980’s. In Mexico, for example, it took 150 pesos in 1990 to buy what one peso could buy in 1980.

That is not going to happen in the US. Large budget deficits have led to high inflation in countries that are forced to create money to finance those deficits because they cannot sell longer-term government bonds. That is not a risk for the US. The rate of inflation actually fell in the US during the early 1980’s, when the US last experienced large fiscal deficits.

Federal Reserve Chairman Ben Bernanke and his colleagues are determined to keep inflation low as the economy recovers. The Fed has explained that it will sell the large volume of mortgage securities that it now holds on its balance sheet, absorbing liquidity in the process. It will also use its new authority to pay interest on the reserves held by commercial banks at the Fed in order to prevent excessive lending. This is, of course, a formidable task that may have to be accomplished at a time when Congress opposes monetary tightening.
Looking forward, investors can protect themselves against inflation in the US by buying Treasury Inflation-Protected Securities (TIPS), which index interest and principal payments to offset the rise in the consumer price level. The current small difference between the real interest rate on such bonds (2.1% for 30-year bonds) and the nominal interest rate on conventional 30-year Treasury bonds (now 4.6%) implies that the market expects only about 2.5% inflation over the next three decades.

So the good news is that dollar investments are safe. But safe doesn’t mean the investment with the highest safe return. If the dollar is likely to fall against the euro over the next several years, investments in euro-denominated bonds issued by the German or French governments may provide higher safe returns. Even if the dollar is perfectly safe, investors are well advised to diversify their portfolios.

● By Martin Feldstein, a professor of economics at Harvard, was chairman of President Ronald Reagan’s Council of Economic Advisors and president of the National Bureau for Economic Research.

The kiss of debt

Ballooning fiscal deficits and rising public debt are raising investor anxiety about sovereign risk in many advanced economies.

SO the world has managed to survive the deepest and longest recession since the Big One in the early 1930s. It did so with extraordinary public policy support – fiscal and financial – the price paid to stop the global economy from falling off the precipice.

Two years on, ballooning fiscal deficits and rising public debt are raising investor anxiety about sovereign risk in many advanced economies.

Ironically, the shoe is traditionally on the other foot coming out of deep recession. Sovereign risk concerns historically reflected profligacy in emerging market economies. In the past, Brazil, Mexico, Russia and Argentina were notable examples of public debt defaults. Many others (Pakistan, Ukraine, Iceland) were forced to restructure under threat of default.

To a large extent, many emerging economies have changed their ways – tightening their fiscal belt, exporting more (some from new commodity resources), lowering debt-to-GDP ratio. Basically, implementing early fiscal consolidation (often times forced on by promises of new credits). This time, severe recession and the recent financial crisis took a high toll on a good number of advanced economies in the eurozone – those with a history of fiscal problems, ignoring reforms in good times.

Today, “biggies” like the United States, the United Kingdom and Japan are made more vulnerable by weak economic (and jobless) recovery and an ageing population – both likely to add to their debt woes, made worse by the monetisation of fiscal deficits (printing money) and ready access to “costless” bank funds via quantitative easing (also printing money).

Unless properly handled, their anaemic economies could fall back into recession (double-dip) and even deflation, with often disastrous impact on their longer-term growth prospects.

PIIGS can’t fly

News over the Chinese New Year holidays was dominated largely by Greece, pressured by the market to bring on early fiscal reform. Together with the other eurozone PIIGS (Portugal, Italy, Ireland, Greece and Spain) – these so-called Club Med members share common traits: weak fiscal and debt positions; weak exports; weak balance of payments; and weak productivity (too high wages) caught in a zone with a strong euro currency, which made them all the more uncompetitive.

What is often not appreciated is that the PIIGS have limited policy options as part of the European Union (EU). For them, their exchange rates are a given. By adopting the euro, they cannot depreciate since they have no currencies of their own. And the European Central Bank (ECB) is not about to weaken the euro for their sake.

They have only one way to go to restore competitiveness – fiscal retrenchment and structural reform. But the PIIGS don’t have a track record of fiscal discipline. Greece, for example, lacks the economic governance of the EU. Yet, it has to make the most of a weak hand at a three-way poker involving the EU, capital markets and potential social unrest at home. If PIIGs fall apart, the European Commission (EC) falls apart.

In my view, they can best do this under an International Moneraty Fund (IMF) programme and not in the shadow of the EC and the ECB without smelling like a bailout. The IMF gives them the best option to re-establish lost policy credibility. Moreover, the euro is not a debt union (Europe is only half-way through creating a viable monetary union); it has yet to have an emergency financial mechanism, if ever.

I must agree with Nobel Laureate Paul Krugman that the euro was adopted ahead of the readiness of all the constituent parts to effectively engage. Harvard’s Feldstein had cautioned early in 1999 that divergent economies can’t work under a single EU roof. Germany had demanded too much: (i) German aversion of debt, and (ii) an authoritarian central bank (ECB) whose excessively tight policies have since aggravated the plight of the PIIGS.

Of course, Germany benefited greatly from the euro. At the same time, Greece and the other PIIGS enjoyed a free lunch as German interest rates pulled down everyone else’s within the euro bloc. Now is payback time. Greece’s ratio of debt to GDP is nearly twice of Germany’s and is projected to hit 120% this year. Its moment of truth came for concealing a 13% budget deficit.

Overall, even the EU is not out of the woods. According to the EC, its public debt ratio could rise above 100% by 2014, i.e. costing an entire year’s output, unless firm action is taken to restore fiscal discipline. This ratio is expected at 84% this year (only 66% in 2007) and rise to 89% in 2011. Ironically, nations aspiring to be members must meet a maximum 60% target!

US and its Aaa rating

Very much like Europe, the United States is not out of the woods either. The deep recession and financial crisis have devastated the state of its public finances. Indeed, the question on most observers mind: Is the United States at (or approaching) a tipping point with global investors? It’s an issue that has become more burning with Obama’s 2010 federal budget envisaging a deficit of US$1.6 trillion, or 10.6% of GDP.

By the end of 2009, public debt had reached US$5.8 trillion or 53% of GDP. This ratio is projected to reach 72% in 2013, unprecedented in US history except when at war. Markets do have a cause to worry. So do we, especially China with very large US dollar reserves.

But for Krugman, the reality isn’t as bad as it sounds. First, the large deficit reflected counter-cyclical expansionary spending (not “runaway spending growth”) to offset the impact of the worst recession in 80 years. It’s already stimulating growth and supporting job creation.

Second, sure there is a longer-term fiscal problem. But once sustainable growth returns, the administration needs to tackle the difficult task of budget reform.

Third, there is no reason for panic. For him, what’s the big deal with projections of interest payments on debt of 3.5% of GDP? That’s what the United States paid under the elder Bush.

And fourth, the “scare tactics” are all politics.

To me, the real concern is whether the United States can stay the course and do what it takes to firmly establish a sustainable recovery, with priority centered on licking mass unemployment. This could even mean facing larger deficits now.

Nevertheless, there is no denying the United States has structural fiscal problems. Serious enough for Moody’s Investors Service to state following the Feb 1 budget release: “Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented…will at some point put pressure on the Aaa government bond rating.”

Quite obviously, this raises fresh concerns. To be fair, under the Democrats in 2007, the public debt ratio was 36% and rose to 40% within a year. It’s expected at 64% this year, 69% in 2011, and go above 70% later this decade.

Let’s not forget Moody’s ratings care more about balancing the budget. It seems to me that growth and job creation matter more, just as how nations do the balancing count. But, frankly, a rating downgrade would not be cataclysmic for the United States. In practice, borrowing costs will rise for all. This simply means more pressure on the deficit and debt.

Japan was marked down in 1998 when its debt ratio hit 115%. Stabilising debt requires some combination of faster growth, higher taxes and lower spending. The trouble is Americans want lower taxes, more lavish social safety net, and the world’s best-funded military machine – by simply piling-on debt.

Till debt do us part

Within the G-7, there is a tacit understanding to resolving the dilemma of high employment and worsening public debt: To persevere in support of growth and job creation now (even at the expense of higher deficits); and then get the budget deficit down real hard as recovery gets firmly established.

As I see it, the growth now economists point to the growing weight of evidence for first priority on the restoration of robust growth. This makes sense given the current high unemployment, debt not being out of control, and more private savings mobilised to finance the deficit (as in Japan). Moreover, an immediate accelerated fiscal cutback now would not produce offsetting private demand to “make a sustainable recovery more likely.”

Indeed, any sharp “reversal” shock can prove damaging to early firm recovery. For them, history is “littered with examples of premature withdrawal of government stimulus” gone wrong (the United States in 1937 and Japan in 1997).

No such dilemma in Asia

With the exception of Japan, most Asian economies (from India to China to South Korea) approach the piling-up of public debt with less hubris.

Even China, with one of the world’s largest stimulus programmes (up to 12% of GDP in 2009), recorded a fiscal deficit of less than 5% of GDP in 2009; its debt ratio was less than 20%. Similarly, India’s ratios were 6% and 22% respectively. Malaysia’s record is quite exemplary, with a fiscal deficit of 4.8% in 2008 and 7.4% in 2009 (expected to fall to 5.6% in 2010) in the face of substantial prime-pumping (up to 8% of GNP); its public debt ratio was 52% (foreign debt of 2%) in 2009.

Japan’s case is rather curious. In 2009, its budget deficit was 10.5% of GDP; its public debt, 200% – twice the size of the economy. This huge debt reflected years of slow growth, numerous stimulus plans, an ageing society and the impact of the global recession. Experts expect it to rise to 300% by 2020. Yet, it manages rather well. Japanese investors, including households, absorb 95% of this debt. Its long-bonds yield was 7.1% in 1990; it’s now 1.4%. The trick, I think, is high private savings in Japan.

Unlike Japan, a significant part of the US debt is financed by foreign savings from China, Japan, Europe and most of Asia. The inconvenient truth is this: the United States can easily and readily borrow as much as it wants until confidence evaporates – not unlike the US dollar.

Much of Asia’s confidence lies in its high rate of domestic savings. Malaysians’ savings are about one-third of the national income. Private savings in United States until the crisis in 2007 was zero; it now saves 6%–7%. Based on this confidence, Malaysia for example can rely on a sustainable stream of non-inflationary finance. So long as development strategies for growth are creditably conceived and designed, the domestic savings will be there to fund such public programmes to build capacity and generate sustainable growth.

Indeed, it is legitimate to ask: Why are excess Malaysian savings used (through investment in US Treasuries) to fund US spending? More so when rates are so miserably low today.

Surely, we do have worthwhile much higher return investments that warrant the use of these excess savings domestically (beyond what’s prudently needed to be set aside for the rainy day) to promote the public good. The efficient allocation of scarce financial resources must form an integral part of the New Economic Model.

 ● By Former banker Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time promoting the public interest. Feedback is most welcome; email:
starbizweek@thestar.com.my.