Billionaire Warren Buffett, whose Berkshire Hathaway posted its worst results ever in 2008, said the economy “has fallen off a cliff” and that efforts to stimulate recovery may lead to higher inflation than that prevalent in the 1970s.
The American public is fearful, confused and changing their buying habits, which is showing up at Berkshire’s operating units, Buffett said today.
While the recession will end and future generations will live better than their parents, the economy “can’t turn around on a dime,” Buffett said, adding that some inflation is appropriate right now.
“We are doing things now that are potentially very inflationary,” he said. Buffett called on Congress to unite behind President Barack Obama, comparing the economic crisis to a military conflict that needs a commander-in-chief. “Patriotic Americans will realise this is a war,” he said.
Berkshire’s shares have lost almost half their value in the past year as the bear market dragged down financial assets and the recession put pressure on profit from the company’s more than 70 operating businesses. The Geico insurance unit has gained ground while the jewellery units are “just getting killed,” he said.
Bailouts of the banking system and “quasi-banks” such as American International Group were necessary, even if “everyone hates” what’s been done to salvage the New York-based insurer, Buffett said. He favoured insuring all bank deposits, and in response to a question about nationalising lenders, Buffett said he doesn’t see any moral hazard in the US seizing an institution when the shareholders are already almost wiped out.
Jobless rate
The unemployment rate is likely to climb, he said, without specifying a level.
Buffett was ranked the richest man in America by the Forbes magazine in October. He transformed Berkshire, based in Omaha, Nebraska, from a failing textile maker into an enterprise with businesses ranging from ice cream and underwear to insurance and corporate jet leasing.
Berkshire’s fourth-quarter net income fell 96 per cent to $117 million, the firm said on February 28. Book value per share, a measure of assets minus liabilities, slipped 9.6 per cent for all of 2008, the worst performance under Buffett’s watch, on the declining value of derivatives and the company’s stock portfolio.
