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Published: August 19,
2009
Warren Buffett wrote an op-ed piece for The New
York Times. One part of the article was predictable. Buffett feels that rising government borrowing will eventually
cause inflation. He goes through an elaborate explanation to get
to that point.
Buffett’s other observation is new. After months of voicing
concerns about the recession, the man considered by many to be
the greatest investor in America writes, “The United States
economy is now out of the emergency room and appears to be on a
slow path to recovery.”
The trouble is that, if Buffett is right about the future, it
may look like the 1970s. After a deep recession, caused in part
by the Arab oil embargo, monetary stimulus and government
spending pushed inflation into the double digits, topping out in
1980 at 13.5%. It was a level not seen in decades and one that
has not been seen since.
A certain level of inflation may be
good. It would temporarily solve the
housing crisis. The value of
residential real estate could
appreciate fairly quickly in a
period when overall prices are
moving up at 10%. The dark side of
that is that mortgage rates would
also be rising quickly. If housing
prices don’t continue to move up
indefinitely, buyers could be stuck
with remarkably high mortgage
payments on properties which are no
longer appreciating in value.
The other great danger of inflation
is that it may erode consumer buying
power. A rapidly rising cost of
goods and services only helps
consumer spending if wages are
moving up at an even faster pace.
Unemployment may still be high in
two or three years. That will tend
to keep worker compensation down as
businesses have their pick of those
out of work.
Buffett is simply treading over
ground that is already well-worn.
Perhaps his fame will draw a bigger
crowd to listen about the perils of
high government spending, taxes, and
rising prices. But, increasing the
number of people who are aware of
the problem will not solve it. Much
of the government’s borrowing is
already underway which means that
the most dangerous cause of future
inflation is already part of the
financial landscape.
-- Douglas A. McIntyre
Editor
247WallSt.com
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