TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 2

BECKY: Right.

BUFFETT: I mean, you--it just--it is paper money, and if you keep issuing more of it--and M2 has been growing very rapidly if you go to the Federal Reserve site and see that, and should be in a period like this. But that is inflationary. The more of these you have out compared to the economic activity, the less it's worth.

BECKY: All right. Well, let me jump ahead based on that...

BUFFETT: I'd better get this off the table before you grab it. Yeah.

BECKY: Yeah, before I take it from you. Let's jump ahead. Guys in the control room, this may throw you off a little bit. We're going to go to number 33. This is from Joey in Brooklyn, New York, and I want to ask this question because it plays into what you just talked about. He asks, "Do you think that the inflation of the late 1970s was worse than the inflation we are about to have? Why or why not?"

BUFFETT: Well, it--again, it depends on the wisdom of federal policies. But--because what we do with the money supply and different--and how we behave later in relation to what we're creating now will determine the answer to that. It certainly has the potential of being worse. We are going--we are fighting a big war, and there--we're using--we're going to use money to fight it. And the whole world is leveraging down. The only party that can leverage up is the US government. They have the ability to take on anything because they can print money as long as people will do business in US dollars. So it could be--it could be worse. And, you know, in economics there's no free lunch.

BECKY: Right.

BUFFETT: There still are lunches it's better to have even if you're going to pay later. I mean, it's better than no lunch if--even if you have to pay for the lunch. And we are having--we're--we are going to attempt to have a lunch; to some extent we're going to pay for it later.

BECKY: All right. We have more questions from people wondering what all that inflation means. We'll get to that in the next hour, and what that means for the markets and some of their investments. But, meantime, Carmen from New York writes in, he says, "Do you believe that the ratings agencies could have single-handedly prevented the current financial turmoil by refusing to rate the exotic products coming out of Wall Street that they apparently did not understand?"

BUFFETT: It would have helped a lot. And--but the rating agencies were populated by people who believed exactly what you and I did, you know, all of the people that come to the Nebraska Furniture Mart and the people that are in Washington and the--you know, when Congress was urging Fannie and Freddie to expand their activities. Everybody believed house prices were not--would never take a real tumble. And that got built into what the rating agencies did as well. But there's no question that if somebody there had taken a stand for some reason, they would have been--they would have been derided for that stand. But if they'd taken a stand, said, `We're going to assume that house prices can fall 25 or 30 percent, and therefore we have to rate this stuff all differently,' it would have--it would have been--they probably would have gone to the other rating agencies and got it anyway. People wouldn't have accepted it. But they did make a--they made a mistake in rating them the way that they did.

BECKY: All right. T. Tidwell from Louisville, Kentucky, writes in and wants to know, "What one thing have you resigned yourself to be a `shocking probable truth' in 2009 that investors would certainly be surprised about now?"

BUFFETT: Hm.

BECKY: That's a tough one.

BUFFETT: I wish I knew. I mean, it was--I'd be acting on it now. No, I think most people's expectations about 2009--well, I would say this. I would say to the extent that--I think we already have the policies in place, but to the extent they get communicated better it will help. But the banking system, if properly handled, is not going to--that's not going to be the problem for the economy. Fear that the banking system may be a problem enters into how the economy behaves. But we have a system that can take care of the banks, and most of the banks are in pretty good shape.

BECKY: So would the one shocking truth potentially be things wind up being better than people expect?

BUFFETT: Well, that...

BECKY: Or you wouldn't go that far?

BUFFETT: No, I won't go that far.

ASK WARREN TRANSCRIPT CONTINUES WITH PART THREE

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