Buffet on the status of the fiscal predicament of the United States:
…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…
Buffet on the solution to the fiscal predicament of the United States:
…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….”
Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.
In case you don’t have faith in Congress to do the politically difficult things, like cutting expenditures, investors can find some solace in the fact that a weakening dollar will benefit your foreign investments immediately because it helps drive those international returns higher as international assets appreciate in value relative to the dollar.
For example, a U.S. investor in the MSCI EAFE Index over the past five years (8/18/04 – 8/18/09) is up 12.74%, while the European investor in the same index and over the same time period is down 1.74% – all thanks to a declining U.S. dollar.
Click here to read Buffet’s complete Op-Ed in today’s NYT.
