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Buffett Fires Shot Heard Round the Markets

NEW YORK: Berkshire Hathaway billionaire Warren Buffett said Monday that the U.S. economy had “fallen off a cliff,” and predicted an inflationary period exceeding the 1970s.

Buffett issued his assessment on CNBC a little over a week after issuing his annual shareholder newsletter, telling his investors the economy was in a “shambles.” Berkshire Hathaway (NYSE: BRK.A & B) lost $11.5 billion in net worth in 2008. A shares are trading at around $80,100, a bargain compared to the 52-week high of $147,000.

“The watchword throughout the country became the creed I saw on restaurant walls when I was young,” the 78-year-old Cornhusker wrote. “‘In God we trust; all others pay cash.’”

Buffett said that banks going broke should be allowed to go broke. Others would survive and earn their way out of the recession, though it would take time for the economy to be rebuilt.

An excerpt from Buffett’s shareholder letter follows:
“This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone ‘all in.’ Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel.

“These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests.

“Weaning these entities from the public teat will be a political challenge. They won’t leave willingly. Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown.

“Had one occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

“Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th Century alone, we dealt with two great wars--one of which we initially appeared to be losing; a dozen or so panics and recessions; virulent inflation that led to a 21 1/2 percent prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15 and 25 percent for many years.

“America has had no shortage of challenges. Without fail, however, we’ve overcome them. In the face of those obstacles--and many others--the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497.

“Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.” – Deborah D. McAdams