So back to the thesis on U.S. taking a $150 billion loan to buy oil in 1930. Even if the country somehow managed to convince creditors that it can afford to take this loan, it would have still bankrupted the country. That’s because GDP fell by 40% between 1930 and 1933, and recovered by 1937. GDP in current dollars was 103.6 billion in 1929 and 91.20 billion in 1930. In 1933, GDP was 56.40 billion, and in 1937 it was 91.90 billion. A country with a GDP of 100 billion, that takes 150 billion loan, has a Debt to GDP ratio of 1.50. A country with a GDP of 50 billion and a 150 billion loan has a Debt to GDP ratio of 3.
If this deal that Munger proposes had been done, the US would have been bankrupt by the depths of the Great Depression. Then the oil would have probably had to be sold for pennies on the dollar, simply to repay the debt.
Even if U.S. withstood the harsh realities of great depression, and kept paying off the debt, it would have been much more difficult to raise money to fight Hitler. Between the end of 1940 and the end of 1946, Federal Debt as a percentage of GDP increased from 44.20% to 108.70%. The increase was because money was needed to fight the enemy. Without winning World War II, the U.S. could have either ended up as a communist country or simply ended up as a Fascist country.
Further, the oil booms of early 20th century, created a lot of rich people, and developed US economy. The growth in GDP from that, has created a ripple effect that has made all of us richer. This is due to increase in science and technology, and due to providing work for people and lifting them out of poverty.
Munger sounds like a lot of other smart and accomplished people, who say that something cannot be done any more at end of their careers. I am specifically referring to his comment about scientific progress. Let’s go through some examples of successful people making predictions:
Ben Graham said one cannot profitably research stocks anymore in 1976. This was false as his prodigy Buffett proved him wrong, as he was picking GEICO at rock bottom prices. Buffett has also bought shares in Washington Post (WPO), Interpublic (IPG) and other companies at rock bottom prices a few years earlier, after analyzing them.
Munger is saying that science and technology cannot help in discovering oil. First of all, the current US energy revolution is helped by improvements in tech. High oil prices will provide companies with incentives to invent technologies to drill for oil in far reaching places. If prices go higher, i can bet scientists will find that you can make oil and gas in a lab.