Wednesday, August 19, 2009

Warren Buffett on Inflation

The Greenback Effect. Oped in the New York Times from Warrent Buffett on inflation. As with everything he writes, well worth reading.

IN nature, every action has consequences, a phenomenon called the butterfly
effect. These consequences, moreover, are not necessarily proportional. For
example, doubling the carbon dioxide we belch into the atmosphere may far more
than double the subsequent problems for society. Realizing this, the world
properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

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.”