2020: How will negative interest rates affect the value of float?

BECKY QUICK: All right, this question comes from Robb Grandish in Washington, D.C. He says, “Interest rates are negative in much of Europe, also in Japan. Warren has written many times that the value of Berkshire’s insurance companies is derived from the fact that policyholders pay up front creating insurance float, on which Berkshire gets to earn interest.

“If interest rates are negative, then collecting money up front will be costly rather than profitable. If interest rates are negative, then the insurance float is no longer a benefit but a liability.

“Can you please discuss how Berkshire’s insurance companies would respond if interest rates became negative in the United States?”

WARREN BUFFETT: Well, if they were going to be negative for a long time, you better — you better own equities. Or you better own something other than — than debt.

I mean, it’s remarkable what’s happened in the last 10 years. I’ve been wrong in thinking that you could really have the developments you’ve had without inflation taking hold.

But we have 120-odd billion — well, we have some — almost — very high percentage in Treasury bills — some in other — and some just in cash, but we — but those Treasury bills are paying us virtually nothing.

Now, they’re a terrible investment over time. But they are the one thing that when opportunity arises — it will arise at a time — and maybe the only thing you can look to pay for those opportunities is the Treasury bills you have. I mean, the rest of the world may have stopped.

And we also need them to protect— be sure that we can pay the liabilities we have, in terms of policyholders over time, and we take that very seriously.

So, if the world turns into a world where you can issue more and more money and have negative interest rates over time, I’d have to see it to believe it, but I’ve seen a little bit of it. I’ve been surprised. So, I’ve been wrong so far.

I do not think that— I don’t see how you can create — I would say this, if you can have negative interest rates, and pour out money and incur more and more debt, relative to productive capacity, you think the world would have discovered it in the first couple thousand years rather than just coming on it now, but we will see.

It’s one of the most — it’s probably the most interesting question I’ve ever seen in economics — is can you keep doing what we’re doing now, and —

We’ve been able to do it — or the world’s been able to do it — for now, a dozen years or so and —

But we’re — we may be facing a — we may be facing a period where we’re testing that hypothesis that you can continue it with a lot more force than we’ve tested it before.

Greg, do you have any thoughts on that. I wish I knew the answer. Maybe, you do? (Laughter)

GREG ABEL: No, I think, as you articulated — I think it was in the annual report, too — I mean, we don’t know the answer.

But, as you said, some of the fundamentals right now are very interesting relative to having a negative interest rate. But I know — I hate to say it, but I don’t have anything to add. (Laughter)

WARREN BUFFETT: I’d love to be secretary of the Treasury, if I knew I could just keep raising money at negative interest rates, that makes life pretty simple.

We’re doing things that we really don’t know the ultimate outcome. I think — and I think, in general, they are the right things, but I don’t think they’re without consequences. And I think they could be, kind of, extreme consequences if pushed far enough.

But there would be, kind of, extreme consequences if we didn’t do it as well. So, somebody has to — you know, balance those — those questions.