Big news at the beginning of last week involved Warren Buffett, Berkshire Hathaway, and the holding company’s sale of 50 percent of its Apple stake. The meaning of the sale, and whether it signals rising bearishness on the part of Buffett and Berkshire is for readers to decide.
Rather than focus on unknowns, it’s more useful to cover a known: the Apple sale increased Berkshire’s cash holdings to roughly $279 billion. Stop and think about that, and in particular think about it in light of what proponents of the so-called “money multiplier” theory tell us with conspiratorial regularity.
They claim that banks, seemingly for being “banks,” multiply money and credit through their loans of the money entrusted to them. This theory carries particular currency within the “Austrian School” community. Though they fancy themselves proponents of free markets, their odd belief that banks play the role of “counterfeiters” and “thieves” through their fractional lending has long had them wanting to ban what they claim banks do.
Neo-Austrians want banks to warehouse money, which is an implied way of saying savers should pay banks a rate of interest instead of being paid for their savings. Naturally savers want something different, as in a return on their savings. Something about compounding. But that’s a digression.
Stop and think about what “money multiplier” theorists are saying: they believe the act of saving without which there are no entrepreneurs, no company expansions, and no jobs has a downside. Supposedly $1,000 entrusted to Bank A, leads to $900 finding its way to Bank B, $810 to Bank C, $729 to Bank D, $656 to Bank, at which point the “banking system” has quickly turned $1,000 into many thousands and beyond!
Except that the theory is total nonsense. It ignores firstly that no one buys, sells, borrows, or lends with “money.” All money flows signal the movement of products for products (buying and selling), or the delayed consumption of products (saving) so that others can attain products right away (borrowing). Which is just a hint that if there were any validity to the “money multiplier” theory, then it would be most certainly true that no would buy with money simply because no one would sell in return for money.
What’s true about buying and selling is even truer about saving and lending. If there were even a scintilla of truth to the “money multiplier” theory, no one would save in a currency that banks are allegedly multiplying into nothingness. And borrowers would similarly not borrow in money? Why borrow what banks are allegedly eviscerating? Funny here is that banks earn in dollars, which raises an obvious question about why banks would aggressively work to wipe out the dollars they earn, but then the “money multiplier” theory has never been about reason.
Which brings us back to Warren Buffett. Having sold half of Berkshire’s stake in Apple, the holding company’s cash pile is now up to $279 billion. Which, if neo-Austrians are to be taken seriously, is soon to be multiplied into nothing. Do shareholder lawsuits loom, or does the theory of “money multiplication” insult theory? Readers can decide whom to take seriously, and whom to dismiss with utmost disdain.
