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Zero interest rates have created a “maritime change” in finance



Billionaire investor Warren Buffett said Saturday that near-zero interest rates have completely changed the financial landscape, warning that the effects of easy money policies remain unanswered.

Since the COVID-19 pandemic hit the United States last year, the US Federal Reserve has cut interest rates to almost zero and started aggressively absorbing assets to prevent a new financial crisis.

Among the purchases of the Federal Reserve: government debt. These actions have allowed the Trump and Biden administrations to issue debts at lower interest rates, to finance the massive aid packages that send trillions to households and businesses.

“This is driving stock prices, making businesses thrive, the electorate happy, and we̵

7;ll see if it causes anything else,” Buffett said at Berkshire Hathaway’s annual shareholders’ meeting, held virtually and live by Yahoo Finance.

The Fed said it would stick to its easy policy until the recovery showed signs of significant further progress.

Buffett said the effect of near-zero short-term interest rates had created an “incredible change in the valuation of everything” due to the reduced incentive to hold relatively risk-free government debt.

He illustrated the example by holding $ 100 billion in short-term treasury bills (Buffett noted that Berkshire Hathaway holds more than that), which would now yield about $ 20 million at a yield of two basis points. Prior to the pandemic, Buffett said these farms would earn about $ 1.5 billion a year.

“It was a naval change,” Buffett said. “It was designed to be like that – so the Fed was moving the way they did, they wanted to make a massive push.”

This boost has contributed to the outflow of higher-yielding assets, from technology stocks to special purpose vehicles (SPACs).

Federal Reserve Chairman Jerome Powell said Wednesday that the broad rise in market prices could be linked in part to central bank policies for easy money, but said the main driver was optimism about reaching a post-pandemic world.

Winners and losers?

Regarding the shares, Buffett said that low interest rates make the shares look like “profitable deals”. The reason: higher interest rates would relatively undermine more of the company’s cash flow.

“Interest rates are relative to the value of the assets of gravity,” Buffett said, joking later, “if I could reduce the attraction of gravity by about 80 percent, I would participate in the Tokyo Olympics.”

Cheap borrowing costs also help households and businesses suffer the most from the pandemic, the same goals of fiscal relief measures.

Buffett’s longtime business partner, Charlie Munger, added during the meeting that lower levels could also reduce inequality between the younger and older generations.

“[They’re] “There will be a hell of a time to get percentages compared to our generation, so the differences between rich and poor in the rising generation will be much smaller,” Munger said.

The losers from low interest rates, according to Buffett, are banks that need to reduce their interest rates on loans. In the depths of the pandemic, Berkshire sold stakes in banks such as JPMorgan Chase (JPM) and Goldman Sachs (GS).

Buffett said on Saturday that he still likes banks “in general”, but wants to reduce Berkshire’s exposure to “possible risk”, which, he admits, has not fully materialized.

“We’ll see where it all goes, but Charlie and I think it’s the most interesting movie we’ve ever seen in terms of economics,” Buffett said.

Brian Chung is a reporter covering the Federal Reserve, the economy and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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