Buffett Finally Admits the Dollar Is Doomed

Finally Warren Buffett said what I’ve been harping on about for two years. In his NYT op-ed piece titled “The Greenback Effect” he admitted that the government is setting us up for massive inflation and destruction of the US Dollar.

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.

During this fiscal year, [our net debt] 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.

The US debt is currently financed by foreigners. Foreigners who have excess Dollars because we used to import everything from them. Three years ago during the height of the housing boom, consumers refinanced their homes every year and bought stuff they couldn’t afford, most of it imported from these same foreign countries. Indeed, consumer spending was 75% of our GDP. But with the collapse in housing, what has happend to consumer spending at the retail level?

Retail spending has dropped off a cliff. Click on the image to go to retailsails.com which is has a lot of in-depth information about the dismal level of retail sales.

And with the decline in spending, imports decline and, in turn, the ability of foreigners to finance our deficit spending. As they decide they no longer want to buy US treasuries at 3.5% but instead would like to buy stock in undervalued companies, real estate or maybe gold, the Federal Reserve is going to have to work overtime to print all the money it needs to fund the government spending. Buffett projects that the Treasury will need to finance at least $900 billion this way!

With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I forget who said it but inflation is essentially taxation without representation!

Rampant inflation will cause the Dollar to lose its purchasing power against foreign currencies and precious metals like gold and silver which have been stores of value for 5,000 years. Unlike paper money, gold and silver are not subject to the human greed of rulers and maintain their value since their supply cannot be increased exponentially.

Buffett knows that the reputation of the Almighty Dollar is at risk.

Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Will Congress do the right thing or just do what’s easy and keeps them in office? Buffett is betting on the later and has slowly been converting his hoard of of billions of dollars in to foreign currencies like the Brazilian real.

At least I’m sure I did the right now when I started buying gold at $495/ounce!

Comments

[Macro_Man:]

With all due respect to Mr. Buffett, he is wrong on interest rates and the dollar. And on stocks going forward. As the bear market continues, I think BRK stock and his reputation will suffer some damage.

Aug 21 06:46 AM

[Moon Kil Woong:]

I respected Buffet much more when he invested and stopped making speeches that serve his own financial positioning. He invested in banks and insurance companies and then touted a recovery and supported TARP when before he lambased such investments. If he invests overseas and then champions the demise of the dollar isn't he just doing the same thing Soros did with all the SE Asian currencies during the Asian financial crisis.

I respect Buffet for finding value and good management, then waiting patiently for the market to recognize it's long term value. I don't respect buffer for taking a position and them using his mouth to try to create a self fulfilling prophecy or take advantage of the most recent public handout to corrupt and insolvent businesses.

If this is what Berkshire Hathaway is all about his former honest and sterling name will become tarnished with age.

Aug 21 07:07 AM

[chap08:]

The comments above sound like a lot of other SA discussion and speak to me of denial. Don't get hung up on short term deflation and miss the big picture. There is no way for America to resolve its problems with a strong dollar. Even if there was, Buffett is smart enough to know it ain't going to happen.

Aug 21 07:33 AM

[doubleguns:]

All these other currencies will race the dollar down just to try to stay competitive. Without our consumers the world is in the hurt locker too maybe not as bad but still in there.

Any currency too strong wont be competitive. As I said before this is a race to the bottom and who ever pulls up first suffers from a lack of competition. Of course who ever pulls up last is not going to do to good either, that might be us, crashed and burned having nosedived in.

If this gets bad enough fiat may not survive this. Get gold!!!!

Aug 21 07:40 AM

[Dave Wrixon:]

But other economies probably don't need you as much as you need them. The US has worried about exporting for more than a generation. It is quite concievable other will get by without you. Indeed, it would appear there is going to be precious little to scrap over. Other economies are recovering. Are they doing it on the back fo the American consumer? I think not. All that is happening is the virtual monopoly on credit enjoyed by America's Baby Boomers has moved on, and it ain't coming back. America has no choice but to export its way out of a hole. As it is currently totally unable to compete in global markets at present, steep devaluation of the dollar is the only answer. The only reason this is not already happening is Uncle Sam needs to borrow massive amounts of money if it is going to maintain spending at current levels, and it would not be able to afford repayments with high interest rates. However, these concerns will evaporate as when it becomes brutally obvious that they either cut spending or risk defaulting then being forced to cut spending even more by their creditors.


On Aug 21 07:40 AM doubleguns wrote:

> All these other currencies will race the dollar down just to try
> to stay competitive. Without our consumers the world is in the hurt
> locker too maybe not as bad but still in there.
>
> Any currency too strong wont be competitive. As I said before this
> is a race to the bottom and who ever pulls up first suffers from
> a lack of competition. Of course who ever pulls up last is not going
> to do to good either, that might be us, crashed and burned having
> nosedived in.
>
> If this gets bad enough fiat may not survive this. Get gold!!!!

Aug 21 07:52 AM

[User 353732:]

Foreign owners of dollars hold or believe they hold claims against the future wealth creating and consumption of imports capacity of the US.
Current Govt and Wall St policies are systematically degrading both the long term wealth creating capacity of the US and the ability of 90% of consumers to spend more on both domestic and imported goods and services.
Wealth creation depends on useful, scalable ,innovation and honest risk taking that leads to fair rewards for entrepreneurial success. The US today has become a hostile environment for entrpreneurial talent, innovative technologies that create tangible value for real people and ethical risk capital. In effect, the US because of Bad Government abetted by Bad Big Money and Bad Media has become hostile to expanding long term wealth creating capacity.
At the same time, rising unemployment and underemployment, declining net worth and compressing investment income for a great majority of Americans coupled with expensive yet constrained credit for scores of millions of Americans( and hundreds of thousands of micro and small businesses) has deeply impaired and will continue to severly limit the ability of consumers to spend more on all goods and services, including imports.

Finally, the Govt is issuing fiat money and increasing debt at a pace unknown in US economic history.

Thus there is an explosion of future claims against US wealth creating and importing capacity even as the latter are compressing .
The ratio of claims to the capacity to satisfy claims is deteriorating at a terrifying rate. For the ratio to be brought into balance( willingly or unwillingly the balance WILL be restored), a siginificant percentage of the claims must be rendered worthless by a deep fall in the value of each dollar. This is what dollar debasement means. Debasement=Doom.

Aug 21 08:37 AM

[yellowhoard:]

So, let me get this straight.

Buffet insisted on Obama for president.

Then, getting his wish, he immediately started moving his investments outside of the US.

I used to think that Buffet was just an old fool.

Now I know better.

He's not foolish. He's evil.

Aug 21 08:45 AM

[EUARTE:]

Buffett claims to hording R$s. If true he may suffer massive losses. The Brasilian economy is based on exports. China right now is a major source of exports. However, China is near the end of it's needs. It has been hording minerals and other commodies from Brasil. It does not need more for some time. There exporting to EU and USA has tanked. They have dumped USD in Brasil to buy these commodies. To my point. The R$ owes it's strength to it's backing by USD's and other currencies but the USD is the heavy there. If the USD continues to fall the value of the R$ will take a sudden trip south. Mr. Buffett will lose big.

Aug 21 08:50 AM

[yellowhoard:]

China won't stop hoarding metals until they run out of dollars.

They're not buying these resources for next year , or even the next five years, they're positioning themselves to dominate the rest of the world for a long time.

With control of rare earth metals and an independent supply of industrial metals, the Chinese will tell the rest of the worlds manufacturers that if they want access to essential metals used in high tech manufacturing they'll need to build it in China.

Game. Set. Match.

Aug 21 09:03 AM

[Macro_Man:]

Have to keep in mind it is not a deflation of prices alone, but a deflation of dollar-denominated debt. That is key. As the value of dollar-denominated debt (and assets; one man's debt is another man's asset) goes down sharply...the value of the U.S.dollar currency goes up.

We will find the trade gap narrowing further and overall U.S.debt (govt, corporations and households) going down. That is bullish for the dollar and for US Treasuries.

People are focusing only on the Federal debt and the Fed. That is looking at the trees rather than the forest.

Aug 21 09:11 AM

[chap08:]

If you have deflation, the real value of dollar denominated debt goes up, not down. That gives the debtor (us) a big problem.

Defaltion goes with a strong dollar, a big trade deficit and a big debt problem. Inflation goes with a weak dollar, a narrowing trade deficit and atleast the chance of addressing our debt problem.


On Aug 21 09:11 AM Macro_Man wrote:

> Have to keep in mind it is not a deflation of prices alone, but a
> deflation of dollar-denominated debt. That is key. As the value
> of dollar-denominated debt (and assets; one man's debt is another
> man's asset) goes down sharply...the value of the U.S.dollar currency
> goes up.
>
> We will find the trade gap narrowing further and overall U.S.debt
> (govt, corporations and households) going down. That is bullish
> for the dollar and for US Treasuries.
>
> People are focusing only on the Federal debt and the Fed. That is
> looking at the trees rather than the forest.

Aug 21 09:57 AM

[Vox Rationalis:]

The author wrote:

"The US debt is currently financed by foreigners."

No. At the end of June, foreign holders accounted for $3.38 trillion or 29.3% of the U.S. national debt (www.treas.gov/tic/mfh.txt, www.treasurydirect.gov...).

"...consumers refinanced their homes every year..."

When rhetoric is hyperbolic, it loses all meaning.

"Retail spending has dropped off a cliff."

You're 8 months late to this party - retail sales fell off a cliff in 08Q4, falling 9% in three months (the previous benchmark in the series, which starts in 1992, was a 4.25% decline following 9/11/2001). Since then, retail sales have been flat - the seasonally adjusted numbers show an increase of 1.7% between December and July [FRED series RSXFS].

"Buffett... has slowly been converting his hoard of of billions of dollars in to foreign currencies like the Brazilian real."

Now I believe you're talking out of your @$$. Please substantiate this claim.

"At least I’m sure I did the right now when I started buying gold at $495/ounce!"

How very nice for you, and how irrelevant now that gold is $950/ounce.

Aug 21 10:33 AM

[Hot Richard:]

"Will Congress do the right thing or just do what’s easy and keeps them in office?"

You're joking right?

One more question, who's Warren Buffett?

Aug 21 09:11 PM

[KIT:]

Buffet made 400 million on CAD but moved back to USD and so continued to ride USD down.

Simply moving to CAD does not really get you anywere because CAD is given as a % of USD so even if CAD goes to par ( one to one with the USD ) you are still tied to the falling USD.

If you buy CAD at par ( as an American ) you are going to lose money because as a commodity based economy relitive high value CAD kills our economy.

The normal relationship ( the workable one ) puts the division USD value 78 to CAD 94 at mid 70s eg 94% of 78 = 74

In the past USD was at 115 and CAD was 62 or 62% 0f 115 is again 72

Every time the mid 70 relationship is where Canada can function

Other countries have their own workable value

Trying to escape to other currencies without knowing this is dangerous

Aug 22 06:45 AM