Friday, 17 June 2011

inflation and stock returns

is a piece by Warren Buffet from 1977, in which he talks about the effect of inflation on stock returns.

some interesting points;

But the potential for real improvement in the welfare of workers at the expense of affluent stockholders is not significant. Employee compensation already totals 28 times the amount paid out in dividends, and a lot of those dividends now go to pension funds, nonprofit institutions such as universities, and individual stockholders who are not affluent. Under these circumstances, if we now shifted all dividends of wealthy stockholders into wages -- something we could do only once, like killing a cow (or, if you prefer, a pig) -- we would increase real wages by less than we used to obtain from one year's growth of the economy.
The Russians understand it too
Therefore, diminishment of the affluent, through the impact of inflation on their investments, will not even provide material short-term aid to those who are not affluent. Their economic well-being will rise or fall with the general effects of inflation on the economy. And those effects are not likely to be good.
Large gains in real capital, invested in modern production facilities, are required to produce large gains in economic well-being. Great labor availability, great consumer wants, and great government promises will lead to nothing but great frustration without continuous creation and employment of expensive new capital assets throughout industry. That's an equation understood by Russians as well as Rockefellers. And it's one that has been applied with stunning success in West Germany and Japan. High capital-accumulation rates have enabled those countries to achieve gains in living standards at rates far exceeding ours, even though we have enjoyed much the superior position in energy.
This parallels to some extend our current situation, and should frame thinking towards government debt. Even though Krugman et al would like us to believe there is no consequence to government spending in a deep recession as there is no inflationary risk, it is still consumption, and by definition building up debt is the opposite of saving. By CONSUMING today, we reduce our ability to generate wealth going forward. Almost all government spending is really consumption, paying high wages, increasing future pension liabilities, hiring more equality officers, is all consumption, and dramatically reduces the countries wealth generation capabilities.

1 comment:

  1. Don't forget the government spending in the priavte sector. Paying barristers £350 an hour to get some scrote locked up, paying bankers similar rates to organise PFI deals, paying accountants and management consultants to do their job for them etc.