Buffet's Partner Says America Is Finished
By Staff News & Analysis - February 23, 2010

Charlie Munger (pictured left with Buffet), Warren Buffett's longtime business partner in Berkshire Hathaway, warns in a new column that the U.S. economic empire is crumbling before our eyes, thanks to federal debt and poor planning. In an article penned for, Munger uses the form of a parable to explain how Wall Street's love affair with gambling has destroyed America's Main Street. The article leads with this headline: "Basically, It's Over." The Berkshire Hathaway vice chairman describes the economic history of Basicland, which happens to match U.S. history. Early in its history, debt is unknown except for home mortgages and some consumer loans, and people live within their means. Speculation is discouraged, and commodities markets are small and tightly regulated. Under this rational system, economic growth skips merrily along at a steady 3 percent, Munger explains. Taxes are limited and pay for only "essential services" like fire protection, courts, and defense. Most taxes are collected on imports, and government spending matches that tax income. Debt via government bonds is limited. Then things take a turn for the worse. – NewsMax

Dominant Social Theme: Basically, blame Wall Street.

Free-Market Analysis: Here at the Daily Bell, we like to take a somewhat longer-term view. We think the course of humankind is somewhat circuitous, an argument between those who would control society for their own ends and a larger mass of humanity that simply seeks to live freely and realize their dreams. Thus, we find ourselves somewhat unsure about Mr. Munger's analysis. He seems to blame the difficulties the US is facing on the casino culture of Wall Street. But we wonder if it so simple. Here's some more of Munger's analysis:

"The extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling," Munger writes.

Financial services soon grow to account for too big a portion of the economy, Munger says. "The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos, many of whom were engineers needed elsewhere."

Then, a shock: Imported energy costs rise, and low-cost labor competition from abroad appears, Munger writes.

"Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors," Munger writes. The U.S. deficit – just the gap between spending and income in one year – is projected to hit $1.6 trillion in 2010. Total debt is project to exceed 100 percent of GDP starting in 2011.

In the parable, Munger strongly suggests that the United States take seriously the campaign of Reagan-era Fed Chairman Paul Volcker, who wants the big banks to cease pretending to be banks if they expect the freedom to trade securities on the side.

"He suggested that Basicland should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees – and former casino patrons – to produce and sell items that foreigners were willing to buy," Munger writes. As the parable ends, none of the politicians listen, and Basicland turned into "Sorrowland," Munger concludes.

The problem with Munger's point of view – from OUR point of view – is that is seems to leave out a lot of pertinent history. We would argue that the problems America faces go back a long ways. They have to do in fact with the creation of the Federal Reserve, the graduated income tax, the growth of the federal government, the empowerment of the executive branch, the loss of power of the states (which began after the Civil War) and the rise of America's mighty military industrial complex which has supported the generation of nearly 1,000 military bases around the world.

America is truly an empire, though one can make the argument it is a bifurcated empire that includes Britain as well. One can also make an argument that an intergenerational power elite has worked patiently to hollow out what once was a republic with an eye toward creating a larger, international structure supported by America's military might. It is this perspective that we find lacking in Munger's parable.

When one examines the arc of Anglo-American history more closely, it is almost indisputable that America's and Britain's current situation did not occur by happenstance. It is the product of intensive labor by those who sought to consolidate power and wealth into fewer and fewer hands. The idea that Wall Street is to blame for the current state of affairs is simplistic in the extreme, we would argue. The problems that America faces go back at least a century or more. They began, in earnest, in fact, with the Civil War and the loss of the right of secession. Once the federal government had established primacy, the damage was essentially done.

NOTED: China tightens bank lending rule … China tightens rules to strengthen control over bank lending. Banking regulators in China have ordered institutions to tighten controls on risk and carefully scrutinize borrowers' ability to pay their debts in a new step to rein in lending. The government's order comes as Beijing tries to prevent excessive lending that it says could lead to financial problems while ensuring adequate credit to keep the economic recovery on track. Chinese leaders worry that a stimulus-driven torrent of lending is fueling a dangerous bubble in stock and real estate prices. Beijing has ordered banks to set aside additional reserves and to keep lending stable, but the central bank has avoided raising interest rates, which might slow down growth. – Yahoo … (Ed Note: The Bell has written about the impending Chinese bubble on numerous occasions. It is far too late for the Chinese leadership to "tighten." The bubble, in our opinion, will burst.)

After Thoughts

We find it somewhat facile to maintain as Munger does that one can ban derivatives and otherwise tinker with the system – and then it will work again, at least after a fashion. In fact, we think that this perspective merely touches the surface of what is necessary. Basically, money must be returned to the private market through the kind of free-banking approach that was once the law of the land. This would of course include freely circulating gold and silver. This would go a long way to starving the US's vast regulatory democracy – including its bloated military and intel structure – one that spawns only more corruption and ruin every day. These would be substantive changes from our point of view. Munger's we would argue, would not.

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