Warren Buffett on inflation

This author needs no introduction, and his concerns need no preamble.

http://www.nytimes.com/2009/08/19/opinion/19buffett.html?_r=2&adxnnl=1&ref=opinion&adxnnlx=1250679809-vkyiY4/BtTu6cDDesIMy4w

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.”

As much as I agree with Mr. Buffett on the abovementioned scenario, I do disagree with this statement:

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. 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.

Actually, studies have been performed on the thresholds of deficits and debts as precursors to inflation and currency crises. See my previous blog on this topic.

http://gregnguyen.blogspot.com/2009/10/tipping-point-for-hyperinflation.html

Economist Peter Bernholz is an expert on the subject of national hyperinflations. He has studied all the major cases of hyperinflation since 1980. His conclusion: The tipping point occurs when a government’s deficit exceeds 40% of its expenditures.

Guess what? The U.S. will hit the 40% mark in 2009.

Mr. Buffett may be wrong on the existence of researched hyperinflation data, but he is in agreement that the US is in danger of entering a period of uncontrolled deficit spending and eventual banana republic-style inflation.