There have been many reasons given for rising gasoline prices; lack of drilling, not building enough pipelines, EPA shutting refineries, a conspiracy by the oil companies, speculators, summer blend, peak oil, and the Jones Act to mention a few. These all probably contribute to higher gasoline prices but are not the main driver of higher prices.
The biggest reason, however, is the current government deficit. The deficit is a huge $1.6 trillion dollars. This is way too big for the government to actually borrow that much money and take it out of the economy. To fund the deficit the government is printing money and debasing the currency. Our children and grandchildren aren’t paying for this later. That’s a lie. We are paying it now.
The debasing of our currency is a tax on anyone with treasury bonds, savings, CDs, a pension or other annuity, wages that don’t rise with inflation; in general the poor and middle class.
Let me show you how this works. Let’s create a simple economy where there is just you and me. You have 4 gallons of gasoline to sell and I have $10 dollars. Since that is all there is in our simple economy, I will purchase the gasoline for $2.50 per gallon. Now, the government to raise money to fund their spending prints $2.50 in new money and buys 1 gallon of gasoline from you. When I show up to buy gasoline, you only have 3 gallons left so the price rises to $3.33. The government has TAXED one gallon of gasoline from my tank into theirs. Anyone who owns U.S. Government debt or currency is going to loose their money. The biggest debtor is the Social Security Administration; everyone’s retirement funds.
Our government is currently ‘borrowing’ 40 cents of every dollar it spends. It is not just gasoline that is going up. Food prices are also rising due to debasing of our currency. There is a reason that the government reports the consumer price index excluding food and energy. You can make the non-food and energy part appears lower by counting things like faster computers as price decreases.
The hypocrisy of the government, particularly Barack Obama is incredible. The wealthy in general do not pay this tax. People who borrow money at low rates will pay it back in depreciated dollars will actually make money. Who borrows money at low rates: the wealthy! They have low interest rate mortgages now and may even get to deduct the interest payments. They also own most of the stock of corporations who borrow low cost money to fund their business. Corporations also get to deduct the interest payments.
Berkshire Hathaway currently has $60.5 billion in debt, representing 37% of their financing. If the debasement of our currency is running at 7% per year; Warren Buffet’s company is making $4.2 billion per year off the government. That is almost $12 million per day!
Warrenthinks we should pay higher taxes. Investors in government debt are already losing money. Just read what Warren had to say about government debt in his letter to shareholders:
Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.
Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal.This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.
Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as “income.”
For tax-paying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor’s visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It’s noteworthy that the implicit inflation “tax” was more than triple the explicit income tax that our investor probably thought of as his main burden. “In God We Trust” may be imprinted on our currency, but the hand that activates our government’s printing press has been all too human.
High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments – and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.
Under today’s conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.
Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain – either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we’ve exploited both opportunities in the past – and may do so again – we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.
Obama is going to have a real hard time spinning this. The vast majority of people may not understand why government fiscal policy is driving up the cost of food and gasoline, but they do understand that when filling up their car costs north of $100, something has to change.