Warren Buffet Talks About a lot of Money

Warren Buffet in the New York Times has a few words to say about the national debt and how it’s going to be funded.

He applauds the way in which the current and former administrations managed to avoid financial meltdown. I think we can all applaud them. In spite of the mistakes, we still have an economy.

However, there’s a however in this story. However part one is that the debt will be 13% of GDP, more than double any peacetime debt. However part two is that as the debt mounts rapidly, our nation loses its “reputation for financial integrity.” Translation: we may rack up too much debt for lenders to feel comfortable letting us borrow more.

The next however, however, is a big, bad one. The US Government needs to borrow $1.8 trillion. Buffet’s optimistic guesses can supply $900 billion from domestic and foreign lenders. That leaves another $900 billion left to borrow from someone. If lenders can’t be found, then the only other way to get the money is to print it.

Congress and the President have approved spending equal to 185% of tax revenues. That is a lot of money. Seriously. If the spending is canceled or taxes almost doubled, the recovery such as it is would have no chance of working and, worse from a Congressman’s view, his chances of re-election would be shot. Nobody has the political courage to pull a stunt like that. That means the printing presses have to run… with almost a trillion more dollars out in the world, what does that do to the value of the dollar? Mr. Buffet looks sternly at the possibility of inflation.

But is that what’s really staring us down? There are other voices that are tapping Mr. Buffet on the shoulder, hoping to get him to direct his glower at the more ferocious threat of deflation. Japan’s had deflation for quite a while now and all the money they’ve printed and debt they’ve run up have still done nothing to budge their economy out of the doldrums. Japan’s economic bad turn came about as a result of a collapse in a real estate bubble.

That’s something worth looking up – market bubbles and Minsky moments. Check the wikipedia and get back to me when you’ve done that. CTRL+T and go to town…

… back? OK. The US already had a massive drop in residential real estate, with many hua hin beach villas hitting an all-time low. Now we’re looking at the coming drop in commercial real estate. Where the residential fall crippled banks that had gambled on subprime, the commercial fall will hit local banks that only gambled on enough tenants to make the projects they underwrote viable enterprises. When those enterprises falter, the economy will see massive asset devaluation.

Now the trillion-dollar question: if the banks catch cold, where will be the domestic lending needed to finance the national debt? If it’s not there, then the government printing presses have to run that much harder, pushing the threat of hyperinflation all the harder. Foreign investors have already shied away from dollar-only debt purchases. That adds to the threat of really bad inflation. Maybe not Zimbabwe bad, but worse than the inflation of the 1970’s and early 1980’s.

While we’re on the subject of debt, what happens if interest rates go up just a smidgen? How much more expensive will it be to just service the existing debt, let alone borrow more?

This is a lot up front for my new students and, quite frankly, it’s a lot for me to sort out. That’s OK, though. The best financial minds in the world are kinda stumped about which way things are going to work out, be it inflation or deflation. There are likely other factors to consider before making a final call.

11 thoughts on “Warren Buffet Talks About a lot of Money

  1. Nolan K

    I went and searched and found out that at 2007 there were $829 billion dollars in circulation, meaning stuff they coined or printed physically. Apparently they stopped posting how much “imaginary money” that are in the banks and in notes and don’t really exist.

  2. Hugo Espiritu

    In a situation like this the saavy financial gurus don’t have that much to worry about compared to the “peasants”. I have recently read a biography over Buffet and two distinct things I have noticed are that he is brutally honest even when it doesn’t benefit him and that he has a knack for finding the light in a dark situation. So when Buffet publicly gives his opinion you know he isn’t just blowing smoke. But you can rest assured that when the financial future of the US becomes clearer Buffet and all those other saavy investors and financiers will take the proper steps to secure themselves. The people who are really going to have to worry are the ones that aren’t as experienced in the craft of economics. They’re the ones who are going to suffer because they don’t know what to do.

  3. Hugo Espiritu

    $829 billion is only the amount of currency in the US not the world, according to chacha.com. As for the amount of currency in the world chacha says that it isn’t recorded

  4. Chi Nguyen

    Went to search up how many U.S. dollars there are. In 2008, there’s about $1,000 trillion dollars. So by now, it might of had doubled since then.
    Deflation- decrease in general price level of goods and services.
    Also, the U.S. Debt is $11,727,742,408,907 and counting. :]

  5. deanwebb Post author

    The $1 trillion number is about right. As for the money in bank accounts, that’s part of a measure called M1 money. See if you can find some figures for that and we’ll get back to the cussin’ and discussin’.

  6. Hugo Espiritu

    It’s ironic that Warren Buffet named his holding company Berkshire Hathaway. Berkshire Hathaway was one of the first mistakes he bought for his partnership. Warren started buying Berkshire Hathaway in 1962 because it met his specific conditions of being a “cigar-butt”, his term for an undervalued company,for its recent poor results. Buffet soon realized the mistake he made when Berkshire kept on with its losing record. At first Berkshire wasn’t a problem because Buffet’s original intent was to liquidate it, but Buffet’s phobia of confrontation prevented him from unemploying the Berkshire workers. The business had been a bad one since its beginning, relying on a tariff to keep it competitive against cheaper foreign mills. As time passed on it was getting closer to extinction as Southern competitors sold cheaper products. Warren all the while continued to buy stock. Buffet didn’t get rid of it until twenty years later. Buffet had gotten attached to it so even after he got rid of it he kept the name.

  7. Hugo Espiritu

    They don’t call Buffet the Oracle of Omaha for nothing. I noticed in the biography I’ve been reading about Buffet that he’s been preaching the downfall of the dollar since 2004. Sure he’s always been subconsciously wary of the dollar since his dad always told him how the dollar would be worth nothing one day; and sure he’s invested in silver based on that superstition but he was noticing the growing deficit of the US and its potential hazards to the currency. In effect Buffet invested in foreign currencies. It just goes to prove the point I made on the first blog I posted; the financial gurus are the ones who need to worry the least since they know what to do when financial disasters and they have the resources to protect their resources, it’s the average Joe who needs to worry about the portending doom.

  8. deanwebb Post author

    … silver is a good choice. The Chinese have always used silver as a currency when they haven’t used paper.

  9. Chanel Wan

    that is because Chinese people are always ahead of the rest of the world…. even if you look back into history such as printing books, gun powder, and the types of food that they have been eating/ created over the years.

  10. Hugo Espiritu

    Did you know Buffet that Warren Buffet still lives in the first home he bought. he payed abuot $30K for it

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