Warren Buffett on deficit spending

Warren Buffett, of Berkshire Hathaway fame, was recently the Charlie Rose talk show. Here is an exchange:

Charlie Rose: This question is asked frequently: Will at some point the deficit and the debt and the decline of the dollar get to a point that people who hold our debt will no longer want to buy and then we're in a crisis?

Warren Buffett: We cannot keep running fiscal deficits like we are currently without having a lot of consequences over time... If you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.s in effect to the rest of the world, that leaves another trillion. And you know, the domestic savers are not going to come up with a trillion... so these numbers are unsustainable over time, what we're doing. It is true, though, that if you keep flooding the world with your debt and people see your fiscal policies are sort of out of control, they're going to get less and less and less enthused about your debt. And then, one of two things happen. Either you keep paying more and more to roll over that debt or you start monetizing it like crazy...

The Federal Reserve Bank has been monetizing the debt since March, 2009, catalyzing a rally in equities, commodities, and bonds to a lesser extent. It keeps short-term interest rates artificially low, in an attempt to stimulate the economy. As it did in the early 2000's under former Fed Chairman Alan Greenspan, it also created a massive bubble in certain asset classes, namely the housing market and equities.

With government bailouts and buying of collaterized debt securities, toxic assets have been shifted from the private sector (banks) to the public sector (government agency and US Treasury debts). The mortgage problems haven't been solved--it just shifted to the FHA. And when the bubble in government securities bursts, foreign sovereign governments won't be there to pick up the pieces.