Warren Buffett’s Bearishness Tramples On The ‘Money Multiplier’ Myth

SUN VALLEY, IDAHO – JULY 14: Warren Buffett, Chairman and CEO of Berkshire Hathaway, makes his way to a morning session at the Allen & Company Sun Valley Conference on July 14, 2023 in Sun Valley, Idaho. Every July, some of the world’s most wealthy and powerful figures from the media, finance, technology and political spheres converge at the Sun Valley Resort for the exclusive weeklong conference. (Photo by Kevin Dietsch/Getty Images)

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Holding company Berkshire Hathaway has $340 billion in cash and cash equivalents. Media speculation indicates that the cash reflects Warren Buffett’s belief that corporations are presently overvalued.

Without presuming to know the precise thinking of one of the world’s greatest investment minds, it’s better to focus on the smaller truths of Berkshire’s cash stash. Specifically, it eviscerates the popular neo-Austrian School view that all-powerful banks, seemingly for being banks, multiply money into worthlessness.

While Ludwig von Mises knew that market actors borrowed money for what it could be exchanged for, conspiracy-soaked neo-Austrians find something nefarious in the movement of resources from savers to those who have an immediate need for savings. Unlike his disciples, Mises understood that no one borrows “money” to begin with, rather products borrow products whereby the would-be productive borrow money exchangeable for real resources with an eye on deploying the resources in a way that enables profit after the loan is paid back with interest.

What’s basic has long had the neo-Austrians up in arms. They imagine that the act of lending by banks that rent money at a lower rate with an eye on lending it at a higher rate is tantamount to devaluation. Except that if lending was the same as devaluation, no one would save. Get it?

Neo-Austrians seemingly do not. To them, bank lending has multiplicative qualities whereby Bank A rents $100,000 from a saver, lends out $90,000 to a borrower who then banks the money at Bank B, only for Bank B to lend out $81,000, only for the borrower to bank the $81,000 at Bank C that lends out $72,900. Whether or not banks keep 10 percent (in a normal world there would be no reserve requirements) is to miss the point.

What is the point? Neo-Austrians imagine that $100,000 rented by Bank A from the saver soon enough morphs into millions, billions, and seemingly trillions of dollars coursing through the economy, all to the dollar’s detriment. But for one problem. There’s still only $100,000 moving around the economy. If you doubt this, ask why anyone would borrow money that for being borrowed will be instantly exchangeable for much less? And just who would lend for the same reason?

Money never, ever multiplies. If it did, no one would put money in banks to begin with. In other words, the neo-Austrian explanation of the mythical money multiplier explains why it’s a myth. If saving were the same as devaluation, there would be no savers.

Better yet, banks wouldn’t rent savings in the first place. Why would they? If the funds they’re paying for will soon enough multiply dollars into worthlessness as the conspiracy-addled neo-Austrians imagine, there would be no banks. Rare is the business that grows by intermediating what is rendered worthless by the intermediation.

After which, we merely need to return to Berkshire Hathaway’s cash position. “Money Multiplier” theory presumes that what Buffett isn’t investing is rapidly multiplying as those renting Berkshire’s stash (rest assured that all $340 billion is in the hands of other profit-motivated individuals working to profitably deploy it), which presumes that Austrian theorists know that Buffett is unwittingly being thieved by those “big, bad” banks.

Back to reality, if there were any validity to the neo-Austrian “money multiplier,” Berkshire Hathaway would have no cash. Except that it does. $340 billion worth. And the $340 billion is the surest empirical evidence beyond simple reason that there’s no reason for neo-Austrians to always be crying hyperinflation.