"U.S. Economy has Fallen Off a Cliff"

Posted 09 March 2009 CNBC Host Becky Quick sits with billionaire and Berkshire Hathaway CEO Warren Buffett to discuss the U.S. economy and where we are headed.Related content...Visit the "The Billionaire Next Door: Restoring Trust" website

Warren Buffett stated the U.S. economy has “fallen off a cliff.”  He says the economy has slowed down and Americans have changed their spending behavior. Buffett: ”That’s why Wal-Mart is doing well… our jewelry stores just get killed in a period like this. ”  Buffett says, “I’ve never seen American consumers more fearful.”  As a result of their fear consumers are pulling back and the economy is unable to thrive.

Dan from New Jersey asked Buffett “Was the financial system hours or days away from collapse?” Warren Buffett responded, “In September, I think it was. If there was a week where 200 billion, as I remember, in the first three days or so poured out of the money market funds, which had about 3 trillion in them, the money was just gushing out when Reserve broke the buck. That meant that the commercial paper market was disappearing. The blood was being drained from the American economic body.”

Although we are going through rough times. Warren Buffett is optimistic. "American business is a machine that gets gummed up sometimes.  It's been a good place overall." He believes that in five years the economy will recover.

Buffett believes that President Obama has to give a clear economic message to Americans.  Republicans and Democrats need to come together during this crisis.  The government’s priority should be to win the economic war by helping out banks and financial institutions first.   If the message isn't clear then Americans are confused and fearful.  If Americans are fearful then the U.S. will not flourish out of this crisis.  Buffett says, "The government is going to play an enormous factor in our confidence."

CNBC Host Becky Quick asked Buffett  "Unemployment is at 8%, where did he see unemployment heading?" Buffett’s response, "Its going to go higher.  Going to go a fair amount higher.  Five years from now it should be running fine but I wish it would happen faster."

A Viewer, Greg from Georgia, asked Warren - How do we best prepare for the inflation that will result from the stimulus and how severe do we expect it to be? "Its hard to tell how severe it could be.  We are certainly doing things that could lead to a lot of inflation.   The best asset during inflation is your earning power -  your own talent.  Make yourself more valuable.  The second best asset is a good business that you may own yourself or through equities."

Buffett believes, "Citi's probably going to keep shrinking, but in the end nobody should be worried about having their money in Citi." The answer is that you can keep your money in the bank.  The FDIC insures 3600 banks and since 1934 no depositor has lost any money.   Buffett says, it’s the shareholders who will be penalized.

President Obama’s administration is raising taxes on the wealthy.  Buffett stand on this issue is, " I think guys like me have gotten off."

Warren Buffett’s thoughts on the Big 3 (Ford, GM and Chrysler) are they need a new business model and a recovery plan.  Buffett explains, "If we modify the business model to adapt to the reality of a 13 million units a year and we'll do better than that in the future in some years."

Berkshire Hathaway has large stakes in American Express (151.6MM), Coca Cola (200MM), ConocoPhillips (84.8MM) and Kraft Foods (130MM). If Buffett buys shares in a business he prefers to hold it "forever."   He believes long term bank  prospects like Wells Fargo and U.S. Bancorp are good investments.  Unfortunately, his purchase of ConocoPhillips and banks in Ireland were a mistake in the last year.  Buffett keeps a minimum of$10 Billion in cash so he doesn’t have to rely on any one thing.Find out more...• Replay slideshow • Visit the “The Billionaire Next Door: Restoring Trust” websiteShow premieres Monday, March 9th 8p | 5p ET