The Duplicity of Warren Buffett

by Eric Englund
by Eric Englund
Recently by Eric Englund: The Next Big Short: U.S. Treasury Bonds

Through Warren Buffett’s letters to Berkshire Hathaway’s shareholders, and his op-ed pieces, one can conclude Warren Buffett has little respect for private property rights. If Mr. Buffett took the time to read Frank Chodorov’s masterful book The Income Tax: Root of All Evil, he would properly conclude (I hope) taxation is theft. Instead, he celebrates the Sixteenth Amendment to the U.S. Constitution and has written forcefully about his support for income taxes, estate taxes, and double taxation of dividends (for more on these matters, read this Forbes article: Warren Buffett's Tax Fetish). Warren Buffett earnestly portrays himself as a loyal financial supporter of Uncle Sam and deems himself to be Uncle Sam’s "grateful nephew." However, when examining how Warren Buffett and Charlie Munger have structured Berkshire Hathaway’s investment portfolio, it is painfully clear Warren Buffett does not put his money where his mouth is. For someone who has pledged financial allegiance to the United States, Mr. Buffett speaks with a forked tongue.

So let’s begin with how Warren Buffett paints his image as to being one of Uncle Sam’s most devoted financial benefactors. He does so by writing this folksy passage in his February 27, 2004 letter to Berkshire Hathaway’s shareholders. To be sure, he gushes about the staggering amount of federal taxes Berkshire Hathaway will pay against its fiscal-year 2003 income, and wonders aloud how he can do even more to help Uncle Sam carry his "fiscal load." Without further ado, here is the spin master himself, Warren Buffett:

On May 20, 2003, the Washington Post ran an op-ed piece by me that was critical of the Bush tax proposals. Thirteen days later, Pamela Olson, Assistant Secretary for Tax Policy at the U.S. Treasury, delivered a speech about the new tax legislation saying, "That means a certain Midwestern oracle, who, it must be noted, has played the tax code like a fiddle, is still safe retaining all his earnings." I think she was talking about me.

Alas, my "fiddle playing" will not get me to Carnegie Hall – or even to a high school recital. Berkshire, on your behalf and mine, will send the Treasury $3.3 billion for tax on its 2003 income, a sum equaling 2½% of the total income tax paid by all U.S. corporations in fiscal 2003. (In contrast, Berkshire's market valuation is about 1% of the value of all American corporations.) Our payment will almost certainly place us among our country's top ten taxpayers. Indeed, if only 540 taxpayers paid the amount Berkshire will pay, no other individual or corporation would have to pay anything to Uncle Sam. That's right: 290 million Americans and all other businesses would not have to pay a dime in income, social security, excise or estate taxes to the federal government. (Here's the math: Federal tax receipts, including social security receipts, in fiscal 2003 totaled $1.782 trillion and 540 "Berkshires," each paying $3.3 billion, would deliver the same $1.782 trillion.)

Our federal tax return for 2002 (2003 is not finalized), when we paid $1.75 billion, covered a mere 8,905 pages. As is required, we dutifully filed two copies of this return, creating a pile of paper seven feet tall. At World Headquarters, our small band of 15.8, though exhausted, momentarily flushed with pride: Berkshire, we felt, was surely pulling its share of our country's fiscal load.

But Ms. Olson sees things otherwise. And if that means Charlie and I need to try harder, we are ready to do so.

I do wish, however, that Ms. Olson would give me some credit for the progress I've already made. In 1944, I filed my first 1040, reporting my income as a thirteen-year-old newspaper carrier. The return covered three pages. After I claimed the appropriate business deductions, such as $35 for a bicycle, my tax bill was $7. I sent my check to the Treasury and it – without comment – promptly cashed it. We lived in peace.

Being one of America’s top-ten taxpayers, indeed, indicates Berkshire Hathaway is "…pulling its share of our country’s fiscal load." Buffett’s key phrase in this passage, with respect to carrying Uncle Sam’s fiscal load, is this: "And if that means Charlie and I need to try harder, we are ready to do so." This is pure baloney and hypocrisy, on Buffett’s part, and I will show you exactly why – this folksy, self-promoting quote truly is a gift which keeps on giving.

Before exposing Warren Buffett’s insincerity, let’s allow Buffett to provide some more spin regarding his deep devotion to Uncle Sam. On November 16, 2010, the New York Times published Buffett’s op-ed piece titled Pretty Good for Government Work. In this piece, Buffett heaps praise on the federal government’s response to the financial crisis of 2008:

When the crisis struck, I felt you would understand the role you had to play. But you’ve never been known for speed, and in a meltdown minutes matter. I worried whether the barrage of shattering surprises would disorient you. You would have to improvise solutions on the run, stretch legal boundaries and avoid slowdowns, like Congressional hearings and studies. You would also need to get turf-conscious departments to work together in mounting your counterattack. The challenge was huge, and many people thought you were not up to it.

Well, Uncle Sam, you delivered. People will second-guess your specific decisions; you can always count on that. But just as there is a fog of war, there is a fog of panic – and, overall, your actions were remarkably effective.

Buffett goes on to close this op-ed piece depicting himself as one of Uncle Sam’s steadfast supporters:

So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through – and the world would look far different now if you had not.

Your grateful nephew,

Warren

Well, Mr. Buffett, how grateful are you really? Are you and Charlie Munger honestly trying harder to help Uncle Sam carry his fiscal load? Certainly you are aware that your beloved Uncle Sam needs to borrow over a trillion dollars to cover his deficit for fiscal-year 2011. The company that you and Charlie run, Berkshire Hathaway, is one of the wealthiest and most liquid on the face of the planet. You decide how to deploy Berkshire Hathaway’s war chest of funds. Therefore, if your actions are consistent with your words, Berkshire Hathaway would have loaned Uncle Sam tens-of-billions of dollars; with such loans appearing on Berkshire Hathaway’s balance sheet as fixed maturity securities. Actions, ultimately, speak louder than words.

So let’s see if Berkshire Hathaway’s latest financial statement (dated 9/30/10) reveals Warren Buffett to be a grateful nephew dedicated to helping Uncle Sam carry his considerable fiscal load. We must begin by examining Berkshire Hathaway’s balance sheet. At September 30, 2010, Berkshire Hathaway had $34.46 billion of cash and an investment portfolio of $117.08 billion. Hence, this company’s cash and investments totaled to $151.54 billion. Within this total, Berkshire’s fixed maturity securities amounted to $36.35 billion. By going to Note 4 of this financial statement, it is divulged that Berkshire Hathaway’s holdings of Uncle Sam’s debt obligations amounts to a paltry $2.25 billion. Uh, oh; I’m beginning to sense "ungrateful nephew" is a better description of Warren Buffett.

To give some additional context as to why it is obvious Warren Buffett’s actions are completely at odds with his words, consider the following:

• Of Berkshire Hathaway’s total fixed maturity securities, only 6.2% were Uncle Sam’s debt obligations.
• Less than 2% of Berkshire Hathaway’s investment portfolio consisted of U.S. Treasuries and U.S. Agency debt (in other words, Uncle Sam’s debt obligations).
• Less than 1.5% of Berkshire Hathaway’s total liquid assets were comprised of U.S. Treasuries and U.S. Agency debt.
• Berkshire Hathaway’s foreign government fixed maturity securities totaled to $12.03 billion versus $2.25 billion of Uncle Sam’s debt obligations.

With Berkshire Hathaway’s cash and investments of $151.54 billion, and Warren Buffett’s proclamation that he stands ready to work harder at helping the federal government carry its fiscal load, does it not seem duplicitous to have loaned Uncle Sam a trifling $2.2 billion. To add insult to injury, Berkshire Hathaway’s portfolio of foreign government fixed maturity securities exceeds U.S. debt obligations by almost $10 billion. Does this mean Mr. Buffett loves foreign governments five times more than he does Uncle Sam? Why are Buffett’s actions inconsistent with his words? Does the "grateful nephew" not trust his beloved uncle? Never in history has there been a time where Uncle Sam has become so dependent on the kindness of lenders. So, Uncle Sam, has Warren Buffett forsaken thee?

Ah, the truth of the matter is that Warren Buffett has never trusted Uncle Sam. Is it not risky, after all, to lend to an entity capable of creating money out of thin air? This is the essence of what Warren Buffett wrote, on February 25, 1985, in his letter to the shareholders contained in Berkshire Hathaway’s 1984 annual report:

…we dislike the purchase of most long-term bonds under most circumstances and have bought very few in recent years. That’s because bonds are as sound as a dollar – and we view the long-term outlook for dollars as dismal. We believe substantial inflation lies ahead, although we have no idea what the average rate will turn out to be. Furthermore, we think there is a small, but not insignificant, chance of runaway inflation.

Such a possibility may seem absurd, considering the rate to which inflation has dropped. But we believe that present fiscal policy – featuring a huge deficit – is both extremely dangerous and difficult to reverse. (So far, most politicians in both parties have followed Charlie Brown’s advice: "No problem is so big that it can’t be run away from.") Without a reversal, high rates of inflation may be delayed (perhaps for a long time), but will not be avoided. If high rates materialize, they bring with them the potential for a runaway upward spiral.

While there is not much to choose between bonds and stocks (as a class) when annual inflation is in the 5%-10% range, runaway inflation is a different story. In that circumstance, a diversified stock portfolio would almost surely suffer an enormous loss in real value. But bonds already outstanding would suffer far more. Thus, we think an all-bond portfolio carries a small but unacceptable "wipe out" risk, and we require any purchase of long-term bonds to clear a special hurdle. Only when bond purchases appear decidedly superior to other business opportunities will we engage in them. Those occasions are likely to be few and far between.

To be sure, Warren Buffett has remained true to the words he penned nearly 26 years ago. Berkshire Hathaway, over the years, has avoided purchasing U.S. Treasury bonds because Warren Buffett and Charlie Munger distrust the long-term soundness of the dollar. Specifically, they fear the "…chance of runaway inflation." In spite of missing out on a major bull market in T-bonds, Berkshire Hathaway’s investment portfolio has performed so spectacularly well that Warren Buffett’s investment acumen has become the stuff of legend.

Although far from legendary, Warren Buffett’s cognitive dissonance, regarding taxes, is maddening. On the one hand, he celebrates the Sixteenth Amendment and brags about the billions of dollars Berkshire Hathaway pays in federal income taxes – after all, Buffett is self-described as Uncle Sam’s "grateful nephew." Yet, on the other hand, he basically refuses to lend money to Uncle Sam for fear that the federal government will pay back the loans with cheaper dollars; which is, as Ron Paul describes, the inflation tax. Taxation is theft regardless if it is through the overt coercion of income taxes or through the stealth of inflation. Apparently, Warren Buffett approves of theft at gunpoint yet detests having his pocket picked. Go figure.

Don’t get me wrong, I thoroughly sympathize with Warren Buffett’s aversion to lending money to the U.S. government. Frank Chodorov would have agreed with this aversion, and would have preferred that Berkshire Hathaway not lend a single dime to Uncle Sam – for reasons that go well beyond the devastation that inflation brings to a portfolio of Treasury bonds.

But, please Mr. Buffett, stop draping yourself in the American flag and shamelessly promoting yourself as one of the U.S. government’s top financial benefactors willing to do more to help Uncle Sam carry his fiscal load. Your company has tens-of-billions of dollars which could immediately be loaned to Uncle Sam, who is in desperate need of it, yet no such loans are forthcoming from you. This is nothing short of hypocritical.

Perhaps Uncle Sam should ask his grateful nephew the following question: How do you put your money where your mouth is when you speak with a forked tongue?

February 17, 2011

Eric Englund [send him mail], who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. He is also a member of The National Society, Sons of the American Revolution. You are invited to visit his website.

Copyright © 2011 Eric Englund

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