Nebraska billionaire investor Warren Buffett believes the U.S. economy is improving. However, he says the financial price of the federal stimulus package and other big spending bills are looming as a new threat.
Buffett, chairman of Berkshire Hathaway Inc. (NYSE: BRK), wrote a guest op-ed for The New York Times in Wednesday’s edition titled “The Greenback Effect.” It says that while mistakes were made in attempts to end the recession and restart the lagging economy, a meltdown of our economy was avoided by a “gusher of federal money.”
“The United States economy is now out of the emergency room and appears to be on a slow path to recovery,” Buffett wrote. “But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects.
“For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.”
He says the country’s “net debt” — that which is publicly held — is mushrooming. While much of the driving force behind the economic-recovery plans lies with President Obama’s executive branch, the U.S. Treasury Department and the Federal Reserve, Buffett says the ultimate solution to the debt problem lies with the U.S. Congress.
“Our immediate problem is to get our country back on its feet and flourishing — ‘whatever it takes’ still makes sense,” Buffett wrote. “Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with our growth in resources.”
In July, Buffett told cable TV network CNBC that it’s a good time to invest in stocks, even with the Dow Jones Industrial Average having recovered to rise beyond 9,000. In that interview, he said investors shouldn’t wait until businesses turn around before investing in stocks again.
“If you wait until you see the robin, spring will already be over,” he said at the time.
The Greenback Effect
Omaha
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
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.
Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.
An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.
Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).
Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.
Slowing them down will require extraordinary political will. 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. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.
But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.
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.
Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
Lorne Gunter:
Pointing the finger at Warren Buffett
In Wednesday's New York Times, billionaire investor Warren Buffet warned against the dangers of the U. S. government taking on too much debt. Doing so, he explained, could lead to hyperinflation and a devaluation of the American dollar that could transform the United States into a "banana republic economy."
Printing money to cover government spending pushes down the worth of a currency. When a government makes more money, it increases the supply without adding any underpinned worth to the currency; no new goods of value are created, no new profits or income, just more money. Increasing the money supply reduces demand and drives the price down.
Mr. Buffet said there were other choices for covering U. S. federal debt -- each perhaps better than what he referred to as the "greenback effect."
Instead of running the printing presses 24/7, the U. S. could encourage other countries, notably China, to buy up its debt. But this raises issues of sovereignty.
Then there is the possibility of raising taxes or cutting expenditures, Mr. Buffett added. Yet, "legislators will correctly perceive" that doing either "will threaten their re-election." So neither is likely to happen.
Unmentioned by Mr. Buffett as a downside to raising taxes is the likelihood that increasing taxes in the middle of a recession would hurt job creation and business expansion at precisely the wrong moment.
Finally, he wrote, Americans could lower the national debt by saving more and using those savings to buy such debt instruments as government bonds, a wise alternative that Mr. Buffett nonetheless believes is unlikely.
For 25 years now, central banks in industrialized countries have worked to give fiat money something approaching real worth by keeping inflation down and refusing to flood the markets with new paper. Since currencies are no longer backed by tangibles such as gold, controlling the money supply and inflation simultaneously is about the only way to keep governments from confiscating personal wealth by devaluing the value of the money people have in their pockets and in their assets such as homes and retirement accounts.
While Mr. Buffett does not hold out much hope that inflation and devaluation can be avoided-- since they would seem to be the most politically palatable options -- he is keeping his fingers crossed that other solutions could be found.
The irony of all of this is that Mr. Buffett himself is as responsible as any other private citizen in the U. S. for Washington's out-of-control spending, big deficits and inflationary ways.
In his piece in the Times, Mr. Buffett goes out of his way to blame current federal overspending on efforts made "last fall" to avoid a Depressionlike run on banks and other financial institutions.
Why "last fall"? Because back then, George Bush was still president.
And why stick president Bush with blame for the ballooning U. S. debt? Because Mr. Buffett is a key economic advisor to current President Barrack Obama. Indeed, he is so close to Obama that some within the Obama camp have credited Mr. Buffett's endorsement of candidate Obama last summer with giving the former Illinois senator the credibility he lacked on economic issues.
When Warren Buffett threw his reputationas the shrewdest of the shrewd investors behind a first-term senator with a funny name, many voters and political operatives who had never given Mr. Obama a sniff began taking notice. After all if Mr. Buffett said that "you couldn't have anybody better in charge" of the economy, that was good enough for most people.
Mr. Buffett is no longer merely a wise investor, he is now also one of Mr. Obama's closest economic advisors,. He is not just a detached presidential analyst, but a political player with a reputation on the line.
He enthusiastically endorsed Mr. Obama's stimulus package in February and as recently as last month was calling for a second round of pump-priming.
He is directly associated with a president whose bailouts of car makers, subsidies to state and local governments, spending on union-built infrastructure projects and attempts to socialize health care have pushed or will push up U. S. debt by trillions, several times more than Mr. Bush's bank and insurance bailouts. Mr. Buffett is no doubt correct about the perils of too much debt, but if he wants to see someone responsible for the U. S. mess, he need only look in the mirror.
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