The big news early last week was the sale of 50% of Apple shares by Warren Buffett, Berkshire Hathaway and its holding company. We’ll leave it to you to decide what this sale means and whether it signals an increasing bearishness on the part of Buffett and Berkshire.
It’s more useful to work with what is known than to focus on what is unknown. The Apple sale increased Berkshire’s cash holdings to roughly $279 billion. Stop and think about that, especially in light of the conspiracy theories regularly spoken of by proponents of the so-called “money multiplier” theory.
They argue that banks, because they appear to be “banks,” increase money and credit by lending out the money they hold. This theory is particularly popular within the “Austrian School” community, which considers itself a supporter of the free market but has long wanted to ban banks from doing what they claim they do, due to a bizarre belief that banks act as “counterfeiters” and “thieves” through small loans.
The Neo-Austrian School wants you to keep your money in the bank, but this implies that savers should pay the bank interest for their deposits. Of course savers want something else, like a return on their savings, something like compound interest. But that’s a digression.
Think for a moment about what “money multiplier” theorists are saying. They believe that the act of saving has a downside, even though it doesn’t create entrepreneurs, business expansion, or jobs: $1,000 deposited in Bank A goes to Bank B, $900 to Bank C, $810 to Bank D, $729 to Bank E, $656 to Bank F, and so on, at which point the “banking system” has multiplied that $1,000 into thousands or more.
However, this theory is complete nonsense. First, it ignores the fact that nobody buys, sells, borrows or lends with “money”. All money flows indicate the movement of goods and commodities (buying and selling) or the delaying of consumption of goods so that others can get them immediately (savings) (borrowing). This is just a hint that if the “money multiplier” theory has any validity, it is definitely true that nobody buys with money, since nobody sells in exchange for money.
What is true about buying and selling is even truer about saving and lending. If there was even a shred of truth in the “money multiplier” theory, then no one would save in a currency that banks were multiplying into nothingness. And borrowers likewise would not borrow in cash. Why borrow something that banks are allegedly watering down? The interesting thing here is that banks make money in dollars. The obvious question arises as to why banks would actively try to wipe out the dollars they make, but the “money multiplier” theory is not about reason.
Back to Warren Buffett. With Berkshire selling half its shares in Apple, the holding company now has $279 billion in cash. If you take the Neo-Austrian School seriously, that figure will soon be zero. Is a shareholder lawsuit looming, or is the “multiplication of money” theory a theory of contempt? The reader can decide whom to take seriously and whom to dismiss with the utmost contempt.