Berkshire Hathaway 2013 Annual Meeting Audience Question # 13

How has the zero-interest rate policy of the Fed affected Berkshire?

Warren Buffett:

Becky?

Becky Quick:

This is actually a follow-up to the shareholder from Overland Park, the question that was just asked.

This comes from Anthony Starace who is in Lincoln, Nebraska, and he says, “How has the Fed’s zero-interest policy affected Berkshire Hathaway’s various business segments? For example, has it helped or hurt their operations and profitability?”

Warren Buffett:

Well, it’s helped. You know it— interest rates are to asset prices, you know, sort of like gravity is to the apple.

And when there are very low interest rates, there’s a very small gravitational pull on asset prices.

And we have seen that getting played out. I mean, people make different decisions when they can borrow money for practically nothing than they made back in 1981 and ’2 when Volcker was trying to stem inflation and use… and the government bond rates got up to 15 percent.

So, interest rates power everything in the economic universe, and they have some effect on the decisions we make.

We borrowed the money on the Heinz purchase a lot cheaper than we could’ve borrowed it 10 or 15 years ago, so that does affect what people are willing to pay.

So it’s a… it’s a huge factor and, of course, it will… presumably… it will change at some point, although, as Charlie was pointing out in Japan, it hasn’t changed for decades.

So, if you wanted to inflate asset prices, you know, bringing down interest rates and keeping them down… at first, nobody believed they’d stay down there very long, so it reflects the permanence that people feel will be attached to the lower rates.

But when you get the 30-year bond down to 2.8 percent, you know, you are… you’re able to have transactions take place.

It makes houses more attractive.

I mean, it’s been a very smart policy, but the unwind of it, you know, has got to be more difficult, by far, than buying.

I mean, it is very easy if you’re the Fed to buy 85 billion a month and… I don’t know what would happen if they started trying to sell 85 billion.

Now, when you’ve got the banks with loads of reserves there, it might… it’d certainly… be a lot easier than if those reserves had already been deployed out into the real economy. Then you would really be tightening things up.

But I have… you know, this is like watching a good movie, as far as I’m concerned, because I do not know the end, and that’s what makes for a good movie.

So, we will be back here next year and I will… or maybe in two or three years… and I will tell you I told you so and hope you have a bad memory.

Charlie?

Charlie Munger:

Well, I strongly suspect that interest rates aren’t going to stay this low for hugely extended periods. But as I pointed out, practically everybody has been very surprised by what’s happened, because what’s happened would’ve seemed impossible to practically all intelligent people not very long ago.

At Berkshire, of course, we’ve got this enormous float in the insurance business, and our incremental float, when we’re carrying huge amounts of cash, is worth less than it was in the old days.

And that, I suppose, should give some cheer to you people because if that changes, we may get an advantage.

Warren Buffett:

Yeah, we have 40… at the end of the first quarter, we had, whatever it was, 48 or maybe 9 billion or something like that… in short-term securities.

We’re earning basically nothing on that. We do not… we never stretch for yield in terms of commercial paper that brings ten basis points more than Treasury.

Our money— we don’t count on anybody else, so we keep it in Treasurys, basically, and so we’re earning nothing on that.

So if we get back to an environment where short-term rates are 5 percent, and we would still have the same amount, then that would be a couple billion dollars of annual earnings, pretax, that we don’t have now.

But of course, it would have lots of other effects in our business.

We have benefited significantly, and the country has benefited significantly, by what the Fed has done in the last few years.

And if they can successfully pull off a reversal of this without getting a lot of surprises, you know, we will all have been a lot better off.

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