Finally Warren Buffett said what I’ve been harping on about for two years. In his NYT op-ed piece titled “The Greenback Effect” he admited that the government is setting us up for massive inflation and destruction of the US Dollar.
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.
During this fiscal year, [our net debt] 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.
The US debt is currently financed by foreigners. Foreigners who have excess Dollars because we used to import everything from them. Three years ago during the height of the housing boom, consumers refinanced their homes every year and bought stuff they couldn’t afford, most of it imported from these same foreign countries. Indeed, consumer spending was 75% of our GDP. But with the collapse in housing, what has happend to consumer spending at the retail level?
Retail spending has dropped off a cliff. Click on the image to go to retailsails.com which is has a lot of indepth information about the dismal level of retail sales.
And with the decline in spending, imports decline and in turn the ability of foreigners to finance our deficit spending. As they decide they no longer want to buy US treasuries at 3.5% but instead would like to buy stock in undervalued companies, real estate or maybe gold, the Federal Reserve is going to have to work overtime to print all the money it needs to fund the government spending. Buffett projects that the Treasury will need to finance at least $900 billion this way!
With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required.
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 forget who said it but inflation is essentially taxation without representation!
Rampant inflation will cause the Dollar to lose its purchasing power against foreign currencies and precious metals like gold and silver which have been stores of value for 5,000 years. Unlike paper money, gold and silver are not subject to the human greed of rulers and maintain their value since their supply cannot be increased exponentially.
Buffett knows that the reputation of the Almighty Dollar is at risk.
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.
Will Congress do the right thing or just do what’s easy and keeps them in office? Buffett is betting on the later and has slowly been converting his hoard of of billions of dollars in to foreign currencies like the Brazilian real.
At least I’m sure I did the right now when I started buying gold at $495/ounce!