Duplicity of Warren Buffett
by Eric Englund
by Eric Englund: The
Next Big Short: U.S. Treasury Bonds
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
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,
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.
"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.)
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
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
Good for Government Work. In this piece, Buffett
heaps praise on the federal government’s response to the financial
crisis of 2008:
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
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
on to close this op-ed piece depicting himself as one of Uncle Sam’s
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.
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
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
- Less than
1.5% of Berkshire Hathaway’s total liquid assets were comprised
of U.S. Treasuries and U.S. Agency debt.
Hathaway’s foreign government fixed maturity securities totaled
to $12.03 billion versus $2.25 billion of Uncle Sam’s debt obligations.
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
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.
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
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.
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.
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.
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
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.
© 2011 Eric Englund
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