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 administrations of former US president George W. Bush and US President Barack Obama, Buffett said the US is fiscally in “uncharted territory.”
The government is trying to spark business and consumer spending through a US$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 US$1.841 trillion in the year that ends Sept. 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 percent of GDP this fiscal year, while net debt will increase to 56 percent of GDP, Buffett said.
The US budget deficit reached a record for the first 10 months of the fiscal year and broke a monthly high for last month. The excess of expenditure over revenue for last month climbed to US$180.7 billion compared with a US$102.8 billion gap in July last year as the government spent more than in any month in US history, the Treasury said on Aug. 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 percent 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.”
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 percent 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.”
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