24/7 Wall St.

Warren Buffett wrote an op ed piece for The New York Times. One part of the article was predictable. Buffett feels that rising government borrowing will eventually cause inflation. He goes through an elaborate explanation to get to that point.

Buffett’s other observation is new. After months of voicing concerns about the recession, the man considered by many to be the greatest investor in America writes “The United States economy is now out of the emergency room and appears to be on a slow path to recovery.”

The trouble is that, if Buffett is right about the future, it may look like the last 1970s. After a deep recession, caused in part by the Arab oil embargo, monetary stimulus and government spending pushed inflation into the double digits topping out in 1980 at 13.5%. It was a level not seen in decades and one which has not been seen since.

A certain level of inflation may be good. It would temporarily solve the housing crisis. The value of residential real estate could appreciate fairly quickly in a period when overall prices are moving up at 10%. The dark side of that is that mortgage rates would also be rising quickly. If housing prices don’t continue to move up indefinitely, buyers could be stuck with remarkably high mortgage payments on properties which are no longer appreciating in value.

The other great danger of inflation is that it may erode consumer buying power. A rapidly rising cost of  goods and services only helps consumer spending if wages are moving up at an even faster pace. Unemployment may still be high in two or three years. That will tend to keep worker compensation down as businesses have their pick of those out of work.

Buffett is simply treading over ground that is already well-worn. Perhaps his fame will draw a bigger crowd to listen about the perils of high government spending, taxes, and rising prices. But,  increasingthe number of people who are aware of the problem will not solve it. Much of the government’s borrowing is already underway which means that the most dangerous cause of future inflation is already part of the financial landscape

Douglas A. McIntyre