The Greenback Effect
Warren Buffett wrote an opinion piece in yesterday’s NY Times. Overall, I think the article was pretty good. You can read the full piece here.
The upshot of Buffett’s article is that monetary expansion was necessary in order to cure a sick economy, but the problem now is that we are entering unchartered territory as the deficit soars to 13% of GDP. If we keep on this path, we will soon find out how much debt we can take on before we lose our reputation of financial integrity.
Here’s the best part of what Buffett had to say:
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’m glad that Buffett understands the problem that always arises because of the government’s control of the monetary unit and the citizens. Government can always simply inflate and levy a hard tax (rewarding spenders and punishing net savers) without ever having a vote on it.
I think Buffett has nailed it on the head but doesn’t go far enough. The real issue here is that our system places complete control of the supply of money in the hands of the government. We expect the Fed to divine what the future will hold and do everything necessary to aggresively fight off a depression and then perfectly time an exit so that we can avoid massive inflation. When you think of it in these terms (and yes, this really is what we are asking for), the absurdity of the whole scheme becomes self-evident. So the Fed cannot perform the magic we expect from it and Congress has all the incentive to bring on inflation because it is, from a political perspective, the least harmful.
My point here is that giving government the power to engage in monetary expansion altogether is very dangerous and if you see the way the incentives of government are lined up and what the tendencies have been, then you realize that we are simply asking for a miracle if we think that Congress and the Fed are somehow going to work this out perfectly.