Sunday, March 1, 2009

Buffett: An Onslaught of Inflation Likely

Billionaire oligarch Warren Buffett generally doesn't discuss economic trends. However, the current economic crisis and the government response to it has resulted in an unusual warning from him. In his current letter to shareholders of Berkshire Hatahaway stock, he writes:

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
Bizarrely and spoken like a true oligarch, Buffet understand the inflation that is coming, but endorses the government actions that are setting the seeds for the inflation:

Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat..
There is no question that there would have been a severe restructuring of the economy, if the government stayed out of the way, but once the restructuring was finished the economy would have been on a strong foundation. Instead, we have Federal Reserve money printing that will create the extremely serious inflation problems down the road that Buffett warns about.

How does Buffett end up talking both sides of the game? It's clear he knows what's ahead as a result of current Fed actions, but his holdings at Berkshire Hathaway are too intertwined with the current structure of the economy (He holds, for example, a big chunk of Wells Fargo stock, US Bancorp stock and he owns the second largest real estate brokerage firm in the country through his 87.4% holdings in MidAmerican Energy.) for him to be brave enough to call for the Fed to step out of the way.

Thus, he has become an unusual species, an admitted inflationist, supporting government inflationary policies, while freely admitting and warning that these policies will likely result in "an onslaught of inflation."

Strange duck this Warren, an inflationist, who's conscience seems to be bothering him about his calling for an inflationist response from government.

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