The US must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency, billionaire Warren Buffett said.
The “gusher of federal money” has rescued the financial system and the US economy is now on a slow path to recovery, Buffett wrote in a New York Times commentary on Tuesday. While he applauds measures adopted by the Federal Reserve and officials from the Bush and Obama administrations, Buffett says the US is fiscally in “uncharted territory.”
The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and the Fed have spent billions more on separate programs to rescue financial institutions and resuscitate the banking system. The US budget deficit is forecast to reach a record $1.841 trillion in the year that ends September 30.
“Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, said. “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.”
The “greenback emissions” will swell the deficit to 13 per cent of gross domestic product this fiscal year, while net debt will increase to 56 per cent of gross domestic product (GDP), Buffett said.
Record deficit
The US budget deficit reached a record for the first 10 months of the fiscal year and broke a monthly high for July. The excess of expenditure over revenue for July climbed to $180.7 billion compared with a $102.8 billion gap in July 2008 as the government spent more than in any month in US history, the Treasury said August 12.
Officials must still do “whatever it takes” to get the US economy back on its growth momentum, Buffett wrote.
“Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with our growth in resources,” Buffett said. “With government expenditures now running 185 per cent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.”
Dollar index
Pacific Investment Management Co, which runs the world’s biggest bond fund, said in an ‘Emerging Markets Watch’ report that the dollar will weaken as the swelling US deficit erodes its status as a reserve currency. The Dollar Index, which tracks the greenback against a basket of currencies, has fallen 12 per cent from this year’s high in March.
“Unchecked greenback emissions will certainly cause the purchasing power of currency to melt,” Buffett said. “The dollar’s destiny lies with Congress.”
Buffett is the chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc Buffett built Berkshire into a $155 billion enterprise over four decades with dozens of acquisitions, buying companies that sell ice cream, lease private jets and operate power plants.
Berkshire has been buying securities issued by governments outside the US The company held about $11.1 billion in foreign government bonds in its insurance units as of June 30, compared with $9.6 billion three months earlier, Berkshire said in a regulatory filing on August 7.
The value of holdings in US Treasuries and so-called government sponsored enterprises slipped 5.3 per cent in the three months ended June 30 to about $2.5 billion.
