When asked about inflation and the future of interest rates, Charlie Munger was frank during the 2022 Daily Journal Corporation’s (NASDAQ:DJCO) annual meeting.
As usual, the longtime business partner of Warren Buffett and vice chairman of Berkshire Hathaway (NYSE:BRK, BRK.B)) kept things honest, blunt, and rooted in history.
Munger Warns Of Real Economic Risks
When a mechanical engineer from Germany asked whether we could see a major rise in interest rates like we did between 1950 and 1980, Munger acknowledged the complexity of the issue, saying it was “a very intelligent question and a very difficult question.”
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He pointed to the massive scale of money printing by nations like the U.S., Japan, and those in Europe as unprecedented. "When you print money on the scale that modern nations are printing it… we're getting into new territory," Munger said.
Japan, he noted, has printed enormous amounts of money without suffering extreme inflation or chaos. But Munger warned against assuming the U.S. could follow the same path. “If you try and print too much money, it eventually causes terrible trouble,” he said. "And we are closer to terrible trouble than we’ve been in the past, but it may still be a long way off."
Despite the risks, Munger added, “I hope to God the United States has a similar happy outcome” to Japan's, but expressed doubt that the U.S. is as well-equipped to handle economic stagnation. “The Japanese are better adapted for stasis than we are,” he said, describing them as a “duty-filled, civilized bunch of people,” he said in the meeting.
Munger also highlighted the difficulty of governing a multiethnic country like the U.S. compared to Japan. "It’s way harder to run a country which is not monoethnic," he said, referencing research from a Harvard professor.
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According to him, Japan is more culturally unified and has a strong sense of national identity, which makes it easier for them to deal with challenges compared to more diverse countries.
Comparing To The 1970s
Asked whether today's inflation resembles that of the 1970s, Munger brought up the tough measures administered by former Federal Reserve Chair Paul Volcker, who raised interest rates to extreme levels. “The government was paying 15% on its bonds. That was a horrible recession,” Munger said. “It lasted a long time, caused a lot of agony and I certainly hope we’re not going there again.”
But he doubted that today's politicians would allow a Volcker-style crackdown. “I would not predict that our modern politicians will be as willing to permit a new Volcker to get that tough with the economy,” he said.
In fact, Munger warned, “You may wish you had a Volcker-style recession instead of what you’re going to get. The troubles that come to us could be worse… and harder to fix.”
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Too Tempting To Resist
Munger described money printing as politically seductive. "You have a bunch of interest-bearing debts and you pay them off with checking accounts which you're no longer paying interest," he said. “Think of how seductive that is for a bunch of legislators. And of course, when things get that seductive, they’re likely to be overused.”
What Should Regular Investors Do?
Asked for advice on how to protect against inflation, Munger didn’t suggest elaborate strategies. He listed his family's holdings: Berkshire Hathaway stock, Costco (NASDAQ:COST) stock, some Chinese equities via the noted investor and Himalaya Capital founder Li Lu, a bit of Daily Journal stock, and a “bunch of apartment houses.”
He criticized the idea of over-diversifying, calling it overrated. "Very few people have enough brains to get 20 good investments," he said. "To ask for 20 is really asking for egg in your beer.”
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