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.