The explosive rise of the U.S. budget deficit and debt burden will lead to serious inflation down the road, says billionaire and Obama supporter Warren Buffett.
The Congressional Budget Office predicts that government debt will peak around 54 percent of GDP in 2011.
But Buffett told CNBC Monday morning that the ratio could surpass 80 percent — unless there are significant spending cuts or tax increases.
After a testy exchange with Sen. Judd Gregg, who suggested that President Obama’s plans to hike federal spending would only increase the nation’s staggering national debt, Buffett relented by stating that, in the end, the U.S. government simply will do what every other government has done in such circumstances.
“A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt,” Buffett said.
Experience proves that, he points out.
“Every country that has denominated its debt in its own currency and has found itself with uncomfortable amounts of debt relative to the rest of the world, in the end they inflate,” Buffett explains.
“That becomes a tax on everybody that has fixed dollar investments.”
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Of course, it’s likely that these trends also will mean a serious swoon for the U.S. dollar.
Buffett also suggested that dollar denominated investments like T-bills won’t be a wise investment, in the long run.
Elsewhere in the economy, Buffett sees unemployment rising further. “Who knows where it tops out,” he says. But, “it will top out eventually.”
Buffett remains bullish long-term for the economy. “We have a wonderful economy over time,” he says.
We do come out of recessions, Buffett says.
“The biggest thing that brings us out of them is the fact that we have a system that works very well over time, even though it gets gummed up periodically.”
Buffett’s Berkshire Hathaway has $20 billion in cash and is "perfectly willing to make a deal that's compelling," he told reporters at the end of the company’s annual meeting Sunday.
The Oracle of Omaha doesn’t have anything specific in mind, and neither he nor Berkshire’s Vice Chairman Charlie Munger would reveal which sectors of the economy or regions of the country interest them most.
Berkshire is holding its annual meeting over the next few days, an event to which thousands travel just to hear Buffett and Munger hold forth on the economy and Berkshire’s prospects.
Buffett did say that, of the three banks whose stock he already holds — Wells Fargo, US Bancorp and M&T Bank — that Berkshire "would buy stock in any of the three banks at present prices."
Last year, Buffett invested in troubled blue chips Goldman Sachs and General Electric.
Buffett and Munger say the company isn't currently planning to issue new shares or bonds to pay for a big acquisition.
They defended the company’s performance, despite a 31 percent slump in share price from a year ago.
Munger says it’s foolish to judge the firm’s fate by short-term movements in its share price.
"If you think we're in trouble because the stock price went down, you don't understand what's going on," Munger says.
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Munger says Berkshire is following "Andrew Carnegie's playbook."
The steel mogul made himself famous by snapping up market share from struggling competitors during recessions.
Many experts view Berkshire’s purchases of shares in Goldman Sachs and GE in the same terms.
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