CNBC sat down with Warren Buffett in a 3 hour marathon session. You can read the transcript here (I encourage you to read the entire transcript): Warren Buffet on economy.
Mr. Buffett boils down complexity down into something simple – the sign of genius. His basic ideas are:
• Residential real estate is in a depression and the only way out is we have to form 1 million+ new households each year to mop up the excess housing units that were built
• US government revenues have to move up from 15% of GDP to 19% and move expenditures down from 25% of GDP to 21% of GDP; Buffett has mentioned before that a 3% of GDP deficit is fine, we have done it in the past for many years – the 9-10% of GDP deficit we are currently running is unsustainable.
• All businesses are doing well and recovering – except for residential real estate which is in a depression
Here are some portions from the interview:
On U.S. Real Estate
“What is getting killed and what is in a—not in a recession but in a depression is anything connected with residential construction. Those businesses are in a depression. You have a huge segment of the American economy that's doing really quite well. Then you have this other segment which is in a depression, and that depression has much more effect on unemployment…when we get a million housing units, annually, started, I think unemployment will go down a lot.
…we have households, and we have housing units. We built way too many housing units compared to households. Surprise, we had this huge inventory. We're now creating more households than housing units. We're drawing down on the inventory every day. I don't know how long that takes. I know when it's through, when we've reached something close to a balance, that we will have at least a million households being formed annually. It doesn't change the basic equation. We are creating more households than housing units at this 600,000 pace of housing starts. You know the answer is coming, you just don't know exactly when. When it comes, it will be a big change. It would be a terrible mistake to try and do some cash for clunkers type thing that would create a whole bunch of houses…So in 2009, we had very little household formation.”
On Inflation
“…if you drop money on households or you drop money on banks…eventually you'll get an increase in prices, and if you do enough of it, you get a big increase in prices.”
On Federal Government Deficits
“…we're going to have to get 15 percent of GDP that's coming in revenue up to 19 (percent), and we're going to have to get 25 percent spending of GDP down to around 21 (percent).”
On Excess Risk Taking by Banks
“…there should be much more extreme penalties for the CEOs, or the departing CEOs, of companies that are important enough to require society to intervene. And the CEOs walk away rich is, I think--I think it's--I think it's a terrible thing morally; but, beyond that, I think it encourages bad behavior. whether it's WAMU or Wachovia or Freddie... ...or Fannie. They shareholders get creamed, but the managers walk away rich…you've got to make it so the CEO of an institution that requires society to bail out its institution, that CEO goes away broke and his wife goes away broke. The directors pay a big penalty, too.”
On the U.S. Economy
“Right now we have six times the GDP per capita, in real terms, as when I was born. Now, I don't know whether people are happier now or more discontent or what than they were in 1930. But people have a way of adjusting very quickly to things becoming better, and then any little tiny adjustment downward they can get quite unhappy about. So they—they'll have—they'll have plenty of strains in their society, we'll have plenty of strains in our society.
We're going to have to bring our expenditures down to 21 percent or so of GDP, and that's going to require a lot of sacrifice around the country, a lot of breaking of promises we've made.
What has really happened in the last two years, and I'm seeing it in every bit of data I look at, is that the economy has generally kept moving forward. Business after business, you know, Dairy Queens to jet airplanes, it gets better. Except housing is in a depression. Now, you take housing and put it in a depression, not a recession, a depression, and that has a big impact
We don't—the nice thing about it is we're not Japan. We're not Italy.
Italy has no population growth. We are a country where households are formed daily in significant numbers. There was a slowdown in 2009 because of the first impact of the recession, but households are getting formed every day faster than houses are being constructed. That solves itself. Now, it doesn't solve itself as fast as people would like...
...but it does solve itself. And the economy, which is good in many areas, will be very good when that—when that imbalance is worked off.”
See part two of Warren Buffett on the US economy and the Global economy
