Warren Buffet says Quit Printing While Mervyn King says Print More
Posted by Michael A. Kamperman on August 19, 2009
In today’s New York Times, Warren Buffet wrote an Op-Ed saying that the federal budget deficit was too high in relation to the country’s economy and is unsustainable. He made an excellent point that the world is only in a position to naturally invest about $900 billion per year in U.S. Treasuries from a combination of growing U.S. savings and growing foreign reserve surpluses from our key trading partners. He said that the $1.8 trillion annual budget deficit is twice as much as the readily available capital to finance the debt. He then warns about the dangers of printing money to cover the deficit claiming it will kick off high rates of inflation and says the U.S. doesn’t want to risk becoming a banana republic. He states we risk collapsing the currency if we print too much money, or if we allow our debt to GDP ratio to continue to rapidly climb beyond the 56% ratio it is expected to reach by the end of the year. Warren concedes Japan and Italy have much higher debt to GDP ratios than the U.S. does, but we dare not test the upper limit.
The only problem with Warren’s quaint editorial is the facts do not support his fears. If President Obama follows Buffet’s advice he will plunge the world into economic Armageddon. What will happen to the economy if the federal government stops spending money? Gone will be extended unemployment benefits and support for Medicaid payments to the states. Gone will be much of the defense budget at a time we are fighting on two fronts. Or, gone will be Medicare and Social Security. If we continue to borrow our debt to GDP ratio will grow, as will our interest payments on the debt. But Italy and France have a debt to GDP ratio of over 100%. Germany’s is over 80%. Japan has a debt to GDP ratio of over 200% and has been printing money for years. The British pound has rallied 20% against other currencies in the last 6 months and Britain is printing more money compared to its GDP than any country in the world other than Zimbabwe. Britain also has a debt to GDP ratio over 100%. Yet these are the currencies Mr. Buffet fears the world will flee to. These facts were not part of Mr. Buffet’s Op-Ed.
Compare Mr Buffet’s position with that of Bank of England Governor Mervyn King, who is the equivalent of our Fed Chairman Ben Bernanke. It was just revealed that the normally hawkish Governor King wanted to increase the last round of quantitative easing in Britain by 75 million pounds, rather than by the 50 million pounds the board voted for. The only other times Governor King was voted down he wanted to raise rates more than the committee in both 2005 and 2007. So the question in my mind is what has turned the usually hawkish Governor King in the world’s most dovish central banker? I have a feeling he knows where the bodies are buried and he sees the deflationary spiral the world has entered. One of these men is seeking to lead the world down the wrong economic path. The worshippers of the god of inflation can worship at Mr. Buffet’s altar all they want. But I’m following the path of Governor King. Deflation is the global threat and it is gaining a foot-hold in all of the major economies of the world. In a world without wage pressures, declining demand, and massive excess capacity in every industry, those seeing inflation are seeing a mirage.
