osewalrus (osewalrus) wrote,

Warren Buffett Knows What He Is Talking About

Ask any Wall St. analyst quietly, off the record, what the biggest threat it to the economy. The answer I get: lack of disposable income by the average American.

Increasingly, at events I attend, analysts will tell you that the biggest problem for the stocks they watch is that a growing number of people simply cannot afford the products companies sell. Granted, I go to telecom, tech and media conferences. Maybe the answer for aerospace or pharma is different. But analysts consistently site the disparity in income and the declining purchasing power of the average consumer as the biggest threat to the sector. Family moving in together because they cannot afford separate housing means fewer cable and DSL subscriptions. Lower income and more unemployed mean fewer tech toys purchased. Even those emplyed cannot keep pace with what had been regular subscription price increases, prompting greater numbers of subscribers to do without.

Warren Buffett is a smart guy who understands how markets work. He made his fortune in long term investment, carefully building his wealth over decades. He has specialized in picking up basically sound companies that were available at low prices because their owners/managers were unable/unwilling to invest sufficient capital for the long term (Level 3, which Buffett bought in '02, being one example). He can see the writing on the wall. The U.S. needs new revenue to pay debt and fund economic stimulus. He and his buddies can afford it, whereas others cannot. Failure to do something on this soon will prompt further deterioration in the market.

Buffett crafts his op ed as a moral imperative, but he stands it on economic reasoning. Raising the marginal tax rate for the wealthy he argues will not harm investment. On the other hand, there is simply no way to achieve the goals of sustainable government and deficit reduction without new revenue -- which Buffett argues the "super rich" can afford.

Over time, I expect more folks from Wall St. to join Buffett's campaign to save the economy with some rational tax increases on the highest income earners and on corporate earnings. It is, to borrow a phrase, a matter of enlightened self-interest by the elite to maintain a functioning U.S. economy. For a long time, we could finance the current economic structure by borrowing and various accounting games. That time has run out. Too few people have spending power necessary to sustain our economy. They can no longer borrow money to maintain the level of personal spending that sustained the economy previously. Unless someone makes an investment in the U.S., which would result in a modest income redistribution, the economy will continue to crash and burn. Buffett is not alone in recognizing this. The question is, who else will speak up -- and will they be willing to put up money to push that message against those who do not see the same writing on the wall?

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