Warren Buffet, one of the richest men in America, and one of the humblest, has written an Op-Ed piece for The New York Times (you can read the entire piece by clicking here) on the tiny signs of economic upturn and what they might forecast for the near and medium future. It makes fascinating reading – solutions come at a cost, and he spells out the costs.
One blogger jumps from this to forecast a turnaround in the real estate market. Not so fast, I think. There is a huge demographic factor, a huge bulge of the population stepping out of the productive work-force and into retirement, a population which has largely lived large – for today – with little thought to the retirement years.
Those who planned, and squirreled away their monies into investments, into businesses – have also been hit hard. Turnarounds take time, and even so, there is a cost. Not all will recover what they have lost.
Many of this aging bulge will be paring down their expectations and paring down their lifestyles. They will be paring down their spending, except for health care. I don’t think we have a clue what that is going to look like.
The Greenback Effect
By WARREN E. BUFFETT
Published: August 18, 2009
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
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.
An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
You can read the rest HERE