Wednesday, August 19, 2009

Goddamn it Warren! the debt is already there ...

... we're just shifting around who owes it to who. 

That's my basic response to Buffett's op-ed in today's NYT where he complains about our ballooning national debt.  Obviously, the piece is worth reading, and I suppose I probably agree with everything he says in it -- we had to dump money on the market through both fiscal and monetary policy in order to keep the financial system in place and to avoid another debt-deflationary cycle like the Great Depression.  This has worked much better than I expected, but we do have to think about the consequences of it.  The Federal Reserve has to figure out how to take back all that liquidity, and the Federal government has to think about how to get back towards a balanced budget.  Otherwise, the country will eventually go bust either through and explicit default, or implicitly through an inflationary collapse in the dollar.

The problem with the op-ed is not in what it says, but what it leaves out.  It leaves out the fact that this debt is not being created de novo.  It is essentially being transferred from the balance sheets of banks and households to the government.  It leaves out the fact that we have no choice but for this transfer to continue, and neither does the rest of the world, because without it the rush to pay down this debt would leave everyone with more of it, as the value of their would fall even more rapidly.  It mentions but poo-poohs that fact that we've had much higher government debt-GDP ratios in the past, and that other countries have much higher ratios now, all without any appreciable effect on interest rates or inflation.  It leaves out the fact that it is very difficult to get inflation when no one wants to spend any money, to buy any cheap plastic crap or build any factories, when all anyone wants to do is pay down their debt. 

Don't get me wrong, I worry about all this borrowing and liquidity re-igniting another asset bubble which in turn brings back the animal spirits and lands us all in an inflationary bust similar to Germany between the wars.  I worry about the Chinese getting sick of holding dollars.  I worry about the economic effect of the inevitable increase in taxes.  I worry about all of these things happening some day, and I worry about what day that will be -- but I'm pretty sure that today is not yet that day.  And until that day, I worry that scare-mongering about the nation's finances will ultimately only give us a self-defeating push back towards a depression.

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