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Buffett and Gates Reviewing "The Great Slump of 1930" by Keynes

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By Brian Zen - Posted on 30 January 2009

Here is what Bill Gates has to say in the very detailed annual letter of his foundation:

The financial market and economic conditions that have developed this past year are truly unprecedented. I hope two years from now when I write this letter I can look at this section as a reflection of something that was short-term and that has passed, but I think the effects of the crisis will last beyond that.

Warren recently sent me an excerpt from John Maynard Keynes’ essay “The Great Slump of 1930,” which applies to this crisis as well:

"This is a nightmare, which will pass away with the morning. For the resources of nature and men’s devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But today we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time."

If you take a longer timeframe, such as five to ten years, I am very optimistic that these problems will be behind us. A key reason for this is that innovation in every field—from software and materials science to genetics and energy generation—is moving forward at a pace that can bring real progress in solving big problems. These innovations will help improve the world and reinvigorate the world economy.

Looking specifically at the foundation, our assets decreased in value by about 20 percent in 2008. I never thought I would say losing 20 percent is a reasonable result, but it is better than most endowments because so many asset classes went down by more than 20 percent in 2008. The team led by Michael Larson that handles the investments has always done a great job. During the past five years, as the foundation was growing, we spent a bit over 5 percent of its assets each year in addition to the gift from Warren. There is nothing magic about the 5 percent figure, except that it is the minimum required by the IRS. Our spending in 2008 was $3.3 billion. In 2009, instead of reducing this amount, we are choosing to increase it to $3.8 billion, which is about 7 percent of our assets.

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