Charlie Munger’s cautious comments on recent US fiscal and monetary policies

Charlie Munger made two public-speaking appearances in 2020. In both talks he has made interesting remarks about the current state of affairs in the economy — including the U.S. dollar, negative interest rates, and money printing.

He first spoke at the Daily Journal Annual Meeting in February 2020. His second speaking event that year was an online interview for the Caltech Distinguished Alumnus Award in December 2020.

On the role of the U.S. dollar as the world’s reserve currency and the big responsibility it bears to Americans:

Munger: One of the interesting things about the current condition is that the Americans — by accident — have created the reserve currency of the world. And the world needs a reserve currency. And I don’t sense any great sense of trusteeship among my fellow Americans for behaving very well in our responsibilities to the rest of the world with our own currency. Our attitude is we’ll do what pleases us. That’s not my view. I think once you get a big responsibility to other people who are depending on you, you ought to think about them too.

Quick, related question about trade balances:

Question: Do you think it’s necessary for America to record a positive trade balance to keep its prosperity in the next century?

Munger: The answer is no.

His thoughts on the absence of inflation after the 2008 financial crisis:

Question: We have record budget deficits, record unemployment, and record expansion of the balance sheet. Why do you think we don’t have inflation?

Munger: Well, regarding inflation. You know, the economists of the world thought they knew a lot more than they did.

What has happened is weird, that in response to the Great Recession, all the nations of the world have printed money like crazy and have bought all kinds of investment assets. And they’ve done things that nobody in the economics profession would have recommended on this scale even five or so years ago — and yet the inflation has been very low.

I think we all have a lot to be modest about when we talk about economics. Lyndon Johnson said that giving a talk on economics was a lot like pissing down your leg. He says, “It feels hot to you, but it doesn’t influence anybody else very much.” And I’m afraid I can’t do much better than Lyndon Johnson could.

His nervousness about negative interest rates lasting an extended period of time:

Question: There are over 10 trillion dollars of securities around the world with a negative yield. And by the President Trump’s Twitter feed, it seems that he wants to bring negative interest rates to the United States. Are you for negative interest rates or against them?

Munger: Negative interest rates make me very nervous. However, I don’t think the authorities had much choice. It’s politically impossible to do big stimulus rapidly and the only weapon they had in a crisis was to print money and change interest rates. And I think it was probably the right thing to be done. Of course it makes me nervous.

I think, having worked once, people will overdo it. And that’s the nature of governments and people. And of course, that makes me nervous. I don’t know what to do about this.

Question: My question is about the effects of low interest rates on insurance. Lower returns on float may be causing a tighter supply of insurance. For example, there used to be three main underwriters insuring all the taxi cabs in Southern California. Now it is heading towards just one underwriter who will have a monopoly on all commercial taxi insurance in Southern California. You have access to CEOs of GEICO and Wesco and a Rolodex that we can only dream of. So do you see 10 years of low interest rates posing a systemic risk to the supply of insurance?

Munger: I am made uncomfortable with the idea of extremely low interest rates, or negative interest rates even more extreme, lasting a long time. I don’t think anybody knows how those will work. If you are a little uneasy, welcome to the club. I think it’s dangerous and peculiar, but I think we had to do what we did. In other words, I don’t have any good solution for you. I think you’re right to be worried about it.

On quantitative easing and current fiscal deficits:

Moderator: What do you think of the combinations of quantitative easing and large fiscal deficit? And where are they going to lead us?

Munger: Well, there I got a very simple answer and that is, it’s one of the most interesting questions anybody could ask. And we’re in very uncharted waters. Nobody has gotten by with the kind of money printing we’re doing now for a very extended period without some trouble. And I think we’re very near the edge of playing with fire.

Moderator: It is remarkable how much we’ve expanded the money supply; how low interest rates are and how little initial response there has been on…

Munger: Remarkable is not too strong a word. “Astounding” would be more like it.

Moderator: I’ll let you choose the adjective, Charlie.

Munger: It’s unbelievably extreme. Some European government borrowed money recently for some tiny little fraction of 1% for a hundred years. Now that is weird. What kind of a lunatic would loan money to a European government for a hundred years at less than 1%?

During the 2021 Daily Journal Annual Meeting, Munger was asked again about monetary policy. Here’s what he said:

Question: Mr. Munger recently raised the alarm about the level of money printing taking place. What are his thoughts on modern monetary theory?

Munger: Modern Monetary Theory means that people are less worried about an inflationary disaster like Weimar Germany from government printing of money and spending it. So far the evidence would be that maybe the monetary modern monetary theory is right. Put me down as skeptical. I don’t know the answer.

According to Aznaur Midov’s notes of the 2015 Daily Journal Annual Meeting (a), Munger was asked back then if the Fed would reduce its balance sheet. He answered as follows:

Question: Is the Fed going to return to $0.9 trillion of balance sheet the current from $6 trillion?

Munger: I remember coffee for 5 cents and brand new automobiles for $600. The value of money will continue to go down. Over the past 50 years we lived through the best time of human history. It is likely to get worse. I recommend you to prepare for worse, because pleasant surprises are easy to handle.