Note (opinion)

Money, debt and inflation; How did Warren Buffett’s view of economic concepts change?


The value of money in your hands is changing. Nowadays, the concept of “debt” is fundamentally changing, and it is fascinating to see how Warren Buffett completely changed his view of money in a matter of months.

Tim Denning, an Australian author who writes popular articles in economics and finance for news websites such as CNBC and Business Insider, writes in Content Published on the Medium website, Warren Buffett, one of history’s richest and most successful investors, has changed his mind about how money works. According to Denning, it can be valuable to hear the context when financial markets are entering a strange period in which no one understands or can explain the situation properly. Read the rest of this article from the Denning team.

These two quotes from the text made me ponder:

Debt [ایالات متحده] It will not be repaid, but will be refunded.

Have everything except debt.

Buffett explains that when the government can continue to print money to pay off its debt, it is ridiculous to even think that the debt will be repaid. He said:

trick [دولت‌ها] That is, they continue to borrow in your national currency.

So what will happen to your investments, assets and savings as you continue to print money? Let’s look at this in simpler words and see what you can think of.

Money, debt and inflation;  How did Warren Buffett's view of economic concepts change?
Increasing government debt can lower the value of the national currency.

Warren Buffett’s most important lesson on how money works

Warren’s latest comment on how money works challenges everything you thought you knew about money. He stated at this year’s general meeting of Berkshire Hathaway Holding:

The world has become a place where you (governments) can print and sell more money every day and have a negative interest rate in the long run. It’s unbelievable, but it happened and it surprised me. I was wrong so far. Negative interest rates, injecting more money into the economy, regardless of margins, and increasing debt-to-production ratio… you probably think the world should have come this way, not now, but much sooner. we will see.

He continued:

This is probably the most interesting question I have ever encountered in the world of economics. Can you continue the process you have now? [پس از بحران مالی سال ۲۰۰۸] The world economy has been doing this for about 12 years. You will continue this process with all your might and we will test this hypothesis again.

Warren’s description of the free money that has come to all of us (Americans) because of the outbreak of the Corona virus may explain why he recently sold his banking stock in the United States.

The popular economics blog Zero Hedge recently wrote:

Warren seems to be quietly investing against US policies as a well-known anti-gold investor withdraws his capital from the bank to invest it in gold. The bank is the backbone of the US economy, which operates on credit.

A few days ago, a friend of mine told me:

See what billions do, not what they say.

If we want to emulate Warren’s actions, we have to look at the record price breaks in the stock market with skepticism.

Continued inflation

If your currency depreciates as prices rise, you face inflation. Inflation means deducting hidden taxes and duties from your money.

Warren stated:

I mistakenly thought that you could achieve the goals you have achieved now without enduring inflation.

Warren has invested his corporate income in gold and US Treasury bonds, while he calls investing in government bonds “awful in the long run” because Treasury bonds are a type of investment in which you basically lend money to the government. .

Money, debt and inflation;  How did Warren Buffett's view of economic concepts change?
Warren’s new view of how money works sees inflation as a crucial factor.

Therefore, given what is happening in the world economy, Warren prefers to invest his money in the short term on “awful” options. It is a good idea to consider this contextual decision as you consider your money and investments.

Why is all this important?

In this article, we talked about economics, but let’s explain why changing the way money works is important to everyone right now.

Negative interest rates

Negative interest rates are unconventional fiscal policies that are often applied in times of market downturn. If the bank interest rate is negative, you will have to pay extra on your deposit instead of receiving interest and interest. A negative interest rate can be to your detriment because you have to pay to save money. A negative interest rate also means that the bank you choose is likely to run into serious financial problems that may keep them out of the banking business.

It is true that banks have insurance in the event of such an event, but if the problem is very large, deposit insurance will also be useless. Many people do not understand the importance of this issue. They think that the government or a magic insurance policy will take care of their capital without any negative consequences.

In this chaotic world, I do not trust anyone who claims to protect you and your money.

With access to important information, the rich can anticipate the next move of people who are not financially able, and thus plunder the capital of the weaker class.

The data show that many small investors buy stocks using programs such as Robinhood. (RobinHood is an American financial services application that allows users to buy and sell stocks using their smartphones.)

Money, debt and inflation;  How did Warren Buffett's view of economic concepts change?
RobinHood allows users to buy and sell stocks using their smartphones.

While billionaires like Warren are exiting the stock market and looking for more security, ordinary people seem to see themselves as smarter than professionals, or perhaps think they are advanced trading robots that can anticipate and exploit the movements of small investors.

Investment firms use multiple transactions to make their investment decisions and outperform average investors. The same companies are overtaking small investors who use the RobinHood app. In the following, we will clarify this statement.

According to Bloomberg, advanced investment companies have access to and exploit data that determines what position micro-investors have taken and what they are doing. In fact, in this situation, the smart money that big investors bring into the market is opposed to the dumb money that small investors use to buy and sell.

This data allows investment companies to plunder the money of the weaker class in order to pay off their wealthy clients and partners. Interestingly, the name of this app, ironically, is Robin Hood!

Stock market bubble

In a turbulent world with unprecedented unemployment, global health crises and street protests in many parts of the world, stock markets are breaking records. Is this growth insane or catastrophic?

Another prominent billionaire investor, George Soros, called the stock market a bubble and explained why it was no longer active in the market:

Investors are trapped in a bubble created by the Federal Reserve’s increasing liquidity.

Either everything is fine in the markets and businesses have not been affected by the outbreak of the coronavirus, or we are seeing a bubble that is about to burst. I (the author) have no opinion, that’s why I withdraw.

Change in the speed of money circulation

At present, with the uncontrolled printing of large quantities of banknotes, free money is distributed through economic incentives, which slows down the circulation of money. The velocity of money is the number of times a currency is exchanged between different people in a limited amount of time.

Printing large amounts of unsupported money makes a large portion of it unused. But, when such money is finally spent at a slow pace, one of the consequences of targeting the economy is excessive inflation, which can reduce the value of the money for which you have worked hard.

An example of a slowdown in cash flow:

Money, debt and inflation;  How did Warren Buffett's view of economic concepts change?
Recession and slowing down money circulation. Source: Federal Reserve Bank of St. Louis

Example of printing extra money without backing:

Money, debt and inflation;  How did Warren Buffett's view of economic concepts change?
A dramatic increase in the money supply. Source: US Federal Reserve Board of Governors

What we learned

The way money works in society has changed fundamentally and has challenged some of the biggest investment brains, such as Warren Buffett and George Soros. As a result, they are turning to safer investments.

Here’s what you can do about changing the way money works: Be cautious about your money and your investment in the short term.

Another important thing you can learn from Warren is to spend some time understanding some important financial concepts; Including money printing, money supply M1 and M2 (different forms of money based on liquidity), money circulation speed, stock market bubbles (such as technology companies stock market bubble in 2000), positive inflation versus negative inflation (Deflation) And Bail-in versus Bailout in times of economic crisis.

If you understand the basics of how money works, you can protect your capital and your efforts. Do not panic! Just be aware of what is happening in the world economy and use it.

The value of your money is changing. The meaning of the word “debt” and its impact are changing. See what billionaire investors are doing, because what they are doing is informing you of many things you need to know.

You decide whether to transfer your money to a trading app (such as Robin Hood), just watch how your currency depreciates due to inflation, or invest it in a secure asset like a pro.

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