Dateline: Poznan, Poland
Just why is Warren Buffett so rich? His company’s recent annual report appears to tell the story. But I believe history would say otherwise.
Few people today know the history of economic domination in the world.
Sure, we are all taught about the dawn of man in civilizations like Mesopotamia and Egypt. We’ve heard of the European Renaissance and the social changes it brought about.
But few would know that between the ninth and thirteen century, Central Asia led the world in trade. Beyond a robust economic engine, it was also home to some of the world’s toniest cities and great sophistication in arts and science.
For example, it was during this era in Central Asia that “algebra” was given its name, or that the diameter of the earth was calculated. Scholars wrote of medical techniques later adopted by Europeans, and the region was home to some of the world’s greatest artists.
I spent the weekend reading the book Lost Enlightment which tells the story of the region during this fascinating time. However, if you asked most people today, they couldn’t name a single country in central Asia (save for those who paid attention through Borat), let alone the fact that one of them has suffered through a harrowing episode of genocide.
Reading about civilizations that have come and gone – economically and otherwise – always makes me wonder about the present day.
Last month, Warren Buffett’s Berkshire Hathaway released its annual report. There was cause for celebration in Omaha; Class A shares of Berkshire Hathaway are up some $22,000 – or 14% – in the last year.
However, as astute an investor as Warren Buffett is, I have to wonder if he understands what caused the rise and fall of Central Asia, or any of history’s other economic powerhouses.
Because Warren Buffett is unabashed in his optimism for the United States, and I don’t get it.
In Berkshire Hathaway’s latest annual report, the Oracle of Omaha scrawls: “Who has ever benefited during the past 237 years by betting against America?… the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.”
Now, I’ve long held disdain for Warren Buffett’s much-ballyhooed “Buffett Law”. The idea that the world’s largest economy would base economic policy off of the opinions of the top 0.0000006% of its citizens is asinine.
Apparently guys like Barack Obama DO love the 1%.
Warren Buffett has helped influence policy that is causing the United States to be the exact OPPOSITE of the glass-half-full “America” he cheerleads for in his annual report. Successful people such as you and I are leaving the United States in droves because we aren’t part of the lucky club of investors paying taxes Warren Buffett deems to be too low.
But the fact that Warren Buffett believes nothing but blue skies are ahead for the average American wants me want to scream.
Warren Buffett’s United States is one where he can buy up shares of companies like Goldman Sachs merely on the insider knowledge that the government had guaranteed bail-out funds to the bank. Then, politicians buy up shares of Berkshire Hathaway and the crony capitalism grows even more.
I frequently speak about the concept that YOU are responsible for your own success. And Warren Buffett is responsible for his success… not some government, or some tax law, or Barack Obama.
YOU own your success, as does Warren Buffett. The idea that Warren Buffett credits some lines on a map with making him wealthy is beyond me.
But allow us to examine just how Warren Buffett became so wealthy, because while he is obviously an astute investor responsible for generating huge returns, he has also enjoyed advantages few other Americans do.
It is such advantages, propped up by his cronies in government, that perhaps contribute to so much of his optimism.
To begin with, much of Berkshire Hathaway’s holdings are in the equities markets. While Buffett has done an excellent job over the years of picking winners and losers, he has no doubt benefitted from the amazing impact that inflation – and recently endless money printing – have had on the American stock markets.
To put it simply, the reason you earn 0.1% on your savings at the local bank is the same reason Warren Buffett has been able to make great investments as of late. He has profited from one of the greatest frauds in history.
For example, Berkshire Hathaway owns a large chunk of American Express, a key beneficiary in the free money game perpetuated by the Federal Reserve.
Buffett has bought up entire railroad companies, which profit from moving natural resources around the United States. This investment might be hindered if his pal Barack Obama were to approve the Keystone XL pipeline.
Buffett owns insurance companies and re-invests a huge “float” into profitable investments, betting on the come that his insurance policies will never have to pay out.
And while owning an insurance company isn’t an act of crony capitalism in and of itself, Buffett’s penchant for higher taxes on the wealthy IS an example of crony capitalism. For example, Buffett’s insurance companies have lobbied extensively for maintaining the estate tax, a tax for which those companies just so happen to provide insurance for.
Buffett has also used the tens of billions of dollars that are thrown off from his insurance empire every year to invest in deals brought to him directly by the US government. As a result of being such a prominent investor, he was one of the first the US Treasury called during the financial meltdown. The government literally begged him to step in and help ease the financial crisis.
As a result of those insider connections, Buffett got special deals you or I could never get.
In fact, many of Warren Buffett’s holdings are in industries that are highly regulated and require sweetheart connections in government. Could you wake up tomorrow and decide to start a railroad? Of course not.
Warren Buffett and his Berkshire Hathaway empire profit from doing business in a highly regulated United States, where crony capitalists win and the rest of us suffer.
This isn’t a rant against “the 1%”; it’s a rant against Warren Buffett for arguing idyllically for American free markets when he, in fact, benefits from controlled, highly regulated markets accessible to a select few.
You and I don’t have the privileges Warren Buffett does. We don’t have the ability to lobby lawmakers or bend Barack Obama’s ear in the Oval Office.
And as such, our “America” is a much different one than Warren Buffett’s.
The reality is the Warren Buffett is the beneficiary of connections that make his “America” more bright. However, he of all investors should understand the life cycle not only of capital, but of nations.
237 years ago, any of us could have made a fortune starting a railroad or providing insurance services, because few regulations existed in the United States and anyone could easily become an entrepreneur by working hard.
Today, only those insiders like Warren Buffett can enjoy the last scraps of a dying economy. Just as Central Asia withered away, so is the United States Warren Buffett speaks so idyllically of only because of his unique position.
Berkshire Hathaway got its big break buying a small family-owned furniture chain in the Midwest. The owners had to sell in order to pay the huge estate tax bill left by the government. In all of the years since that first big investment, Warren Buffett has relied on crony capitalism and the decline of the US dollar to help him build an empire you or I could never build.
The truth is the Berkshire Hathaway is much less interested in the dying economy of the United States than Buffett’s rah-rah chants would indicate. Coca-Cola, one of the company’s largest holdings, is largely an emerging markets play as rising consumer classes around the world are able to afford the 50 cents it costs to buy a can of Coke.
Fortunately, the opportunity to prosper from truly unregulated, idyllic economies still exists. Places like South America and, ironically, modern-day Central Asia suffer from a lack of venture capital money as local entrepreneurs work to implement tried-and-true business ideas from the west.
Warren Buffett’s now six-year-old “Buy American” op-ed isn’t exactly good advice for today’s aspiring billionaires when lower taxes, fewer regulations, and more open, less competitive markets make business conditions better outside of The Land of the Free.
If you’re Warren Buffett, you can afford to buy American Express. If you’re an entrepreneur in an emerging economy, you can start your own financial services firm and potentially grow it into the next American Express.
Nomad Capitalist is all about helping people like you “go where you’re treated best”. If you want to learn more about what exactly that means, and why I believe so strongly in it, I made this video that is worth watching: