The New York Times published an article by Warren Buffett yesterday. He touches on a couple of subjects that we’ve written about recently:
- our country’s debt, and
- the threat of higher inflation
Warren commends both the Bush and Obama administrations for their courageous actions last fall which helped us avoid a depression. With the US economy now a slow path to recovery, we now face the side effects of “a gusher of federal money” that played “an essential role in the rescue.” Although it may be a long time before these effects are visible, “their threat may be as ominous as that posed by the financial crisis itself.” So what are the side effects Warren’s talking about? Gigantic deficits and inflation.
“To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.”
Our government is spending our nation into a mountain of debt. So how do we finance this increase in debt? Warren points out three ways:
- Borrow from foreigners. Foreigners already hold over 50% of our debt. it’s not a sure thing they’ll continue to buy our treasuries. They might decide to invest in stocks, commodities, or real estate.
- Borrow from US citizens. Americans will have to increase their savings rate and buy more US Treasuries.
- Print money. “With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap. Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes.”
I agree with Warren’s conclusion:
“Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.”
For further reading:
- The Greenback Effect [Warren Buffet]
- The US Budget is on an Unsustainable Path [Adam Zuercher]
- The Truth About the Dollar [Adam Zuercher]
- Is inflation accelerating? [Tony Hixon]
- Why is higher inflation expected? [Tony Hixon]
- Why hasn’t inflation occurred yet? [Tony Hixon]
- When will inflation return? [Tony Hixon]
- How high will inflation go? [Tony Hixon]