By Stephen Leeb, Ph.D., with Megan Davis
The U.S. has found itself with nothing to win and everything to lose if we continue fighting in Iran. Yet we can still snatch a major victory if we realize that losing could be the best thing that has happened to this country since Jefferson’s birth in 1743. Renewed fighting risks further soiling, if not destroying, the legacies of our Founding Fathers. But if the war ends now, perhaps the biggest win, from the U.S. perspective, is that our Constitution remains intact.
Trump certainly didn’t wave a white flag, but it does seem from news reports that he has caved, so to speak. He has dropped the blockade and seems willing to negotiate on Iran’s terms. The proposed deal can certainly be marketed as better than the JCPOA (Joint Comprehensive Plan of Action) that came out of the Obama administration. And, as we are reminded daily with the 24-hour news cycle, it really is all about spin and marketing.
There could even be a hidden positive for Israel in the ending of the war if Netanyahu falls. In our blog, The Hidden Cost of the War in Iran, we wrote about the phenomenon of the Jewish people winning a disproportionately high number of Nobel Prizes relative to the percentage that Jews represent of the world’s population, and we noted the importance in Jewish culture of independent thinking and asking questions. With Netanyahu out of power, and an end to the ceaseless bombing in East Asia, it could ensure preservation of the Jewish culture in Israel, to the benefit of all mankind.
In addition to a peace deal with Iran, if there is a major deal to be had, it will directly or indirectly include China and Russia. We believe such a deal not only would offer the U.S. a way out of the current conflict in Iran, it also could be a path out of our current economic crisis, in which our unmanageable debt is front and center. But such a deal will not be free of cost.
The U.S. and China must come together on how to manage the consequences of the nearly assured trends of a higher yuan and lower dollar. In blunt terms, the U.S. will have to face the music for its failure to win the war with Iran. Indeed, no matter how the ending is spun to the U.S. public, there is no way to escape the fact that the petrodollar has been taken off life support. A major reason Trump will be forced to accept what we hope will be a graceful ending to the war is that Saudi Arabia told him that the U.S. could no longer use Saudi airspace in its fight against Iran. Kuwait echoed the Saudis’ decision. These airspaces are critical because without them, U.S. air strikes against Iran will be severely limited. As we have mentioned before, underlying the petrodollar was a 1974 agreement that required the U.S. to protect Saudi Arabia. That deal has been turned on its head as the Saudis are, in effect, saying we need protection against our former protector.
Even the China Daily, arguably an arm of the Chinese government charged with spreading feel-good stories about China to the English-speaking world, did an about-face in the course of one day. On May 6, its major front-page story was about a small village in East China and its efforts to marry growth with environmental protection. The next day the featured story was headlined “RMB’s role as int’l option grows.” (Translated: The role of the yuan as international options increase.) To the publication’s tens of millions of readers in 180 countries, it would seem China is making an announcement to the world that the dollar’s days as essentially the sole reserve currency are numbered—and that number is very low, indeed.
Our strong belief is that China wants cooperation with America, not conflict. For China and Russia, it is not about “winner(s) take all” but instead a matter of “winners all.” The U.S., once the world’s north star, has fallen on very hard times with an unmanageable debt that comes on top of many other problems. But we believe that the spiritual backbone that was foundational to our country’s greatness still remains. We can take our medicine and accept that high inflation is something we must face, letting us come back just as great as we once were. Thanks to that masterpiece we call our Constitution, it may only be a matter of time before we again find ourselves as first among equals. As for the alternative, in which we tear up our Constitution, we hope and pray that will be relegated to a dystopian fairy tale told to our children to warn what can happen if you forsake what is good and true and adhere to for false gods.
But for now, there will be tough times to face before a much better future comes in view. And for individuals looking for ways to protect themselves against the potential near-term black swans, or tipping points, it can’t hurt to listen to the greatest investor of all time, Warren Buffett. In an interview with Becky Quick at the Berkshire Hathaway Annual Shareholder meeting last week, he pointed out that we could even be facing hyper-inflation—citing the Weimar Republic as an example of the runaway inflation that he hopes we don’t see.
When the great and grounded start talking about the Weimar Republic as a worst case, you are forced to consider the possibility of hyperinflation, deflation or both. In the case of the Weimar, it was both. Hyperinflation after a brief respite was followed by massive deflation, which was followed by Hitler. We definitely hope it won’t be that bad. But that doesn’t change the fact that to get the debt under control, we will need a combination of productivity gains and high inflation.
If AI turns out to be a bust—in the sense that it doesn’t result in an upward spike in productivity—inflation could go higher still. Maybe even dangerously high, well in excess of 10%, in order to get us out from under the current debt. More about that in a future blog.
At that Berkshire Hathaway meeting, it was revealed that the company ended 2025 with $373.3 billion in cash and cash equivalents. We have speculated, and it is admittedly very speculative, that Berkshire’s Treasury bills could be at least partially backed by gold that is then leased to others. Additional short-term assets include nearly $300 billion in equities. Of that $300 billion, roughly a quarter is in stocks that could benefit from surging inflation, with virtually no extinction risk in the case of deflation. They include two major oil companies and investments in five Japanese trading houses. The trading houses are owned in yen, and that makes the investment a hedge against a falling dollar, a likely accompaniment of rising inflation.
But Buffett also made a very insightful point that is easy to lose sight of in the midst of such polarizing, pugnacious times. Against all odds, America has long thrived. We have gone through very tough times as a country before. In fact, in the midst of the Great Depression, there was a man who wanted to find a way to support his family in a comparatively small midwestern town, and he chose—of all things—to open a brokerage firm, arguably one of the most difficult areas to go into at that time. Ten years later, that same man wrote a white paper about the importance of human freedoms, writing that any meaningful freedom is not possible if money is not exchangeable for gold. That man was Warren Buffett’s father.
America has not been the same since going off the gold standard, and we have miles to go before we sleep, but there is hope even in the face of rising inflation that we could use this opportunity to work on a deal with China in which we could be part of a new gold standard with global reach.
Even though we haven’t done everything right, most people still would choose to immigrate to America. And those who have done so seem happy to be here. In his interview, Warren Buffett called that which attracts those people to America our “special sauce.” Maybe part of that special sauce for Buffett was the views on freedom passed down by his father, who held them so close to his heart.
For those of us who remember how America used to be, or who look at the Declaration of Independence and the U.S. Constitution and remain idealistic about what America could and should be again, it can be challenging to remain optimistic. But as we said in the beginning of this article, the Constitution currently remains intact, and that one fact might tell us the outlook may be less bleak than it appears.
When Buffett was at the podium at the shareholders meeting, he was asked if he had any advice to share with longtime business partners and friends. His answer?
The Golden Rule.
While noting that he’s not a religious person, he also noted that everyone who treats people the way they would want to be treated themselves seem to be very happy individuals, and that people have been looking to the morality in the New Testament for 2000 years, unable to find anything better in relation to how to treat one another. Thomas Jefferson shared in this sentiment about morality in the New Testament, which perhaps explains Buffett’s other sentiment about America having that special “secret sauce” that has caused people to desire to immigrate here for the last 250 years. It certainly seems our Founding Fathers got something right in their writing of our founding papers.
We may have a shortcut to the top of the hill again, and that’s our Constitution. Spirituality—a sense of oneness and equality—and a democratic constitution might be a part of that secret sauce that Buffett was referencing that makes America still such a beacon, even in challenging times. We may, in fact, have some turbulent years ahead, and while the Constitution doesn’t need to be rewritten, it may need to be reread. If we’re faithful to our roots, we may be able to return to what we once were.
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