Wednesday, August 19, 2009

The Warren Buffett Op-Ed

Splashed all over the headlines this morning is mention of Warren Buffett's Op-ed piece in the New York Times. What he says in my opinion is obvious. It describes something worse than a 1970s scenario with massive inflation down the road. I still think this is like seeing the housing bubble in 2003. Several more years before it becomes obvious to the overall public. By then of course it is to late. Of course this isn't a housing bubble. It is much much worse.

From the New York Times a couple of highlights:

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.


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.

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