It appears that one of President Obama’s marquee private sector supporters is sending an inflation warning to Washington. Warren Buffett made some interesting comments in a New York Times editorial yesterday that, if not for a full news slate of ObamaCare drama, would have been front page news.
Buffett repeated what he said in his widely read shareholder letter released in February:
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.
Longtime observers of Warren Buffett know that he abhors confrontation, which makes his Op Ed in yesterday’s Times even more remarkable. The unmistakable message in yesterday’s editorial is that the most successful business investor in the last one hundred years is very concerned that massive inflation is a clear and present danger to the economy that is every bit as serious (or more so) than the crisis that threatened the financial system a year ago.
There is a raging debate going on in the financial blogosphere about the threat of deflation and inflation. Violent swings in either direction can devastate a national economy. In customary fashion, Buffett pinpoints the problem succinctly:
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
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.
The conclusion that should be drawn from Buffett’s examples is that current spending is unsustainable. Also, tax increases become problematic at some level for the re election of politicians. So what is the politically easy way out? Inflation.
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.”
For those Wizbang readers that lived through the late 1970’s and early 1980’s, you know where we are headed.