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Buffett's dire warning - Views on News from Equitymaster
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  • Aug 20, 2009

    Buffett's dire warning

    A looming threat for the US
    Warren Buffett, in his traditional simple and homespun style, wrote recently an article in The New York Times explaining how the policies the US government is currently using to tackle the crisis can affect the country over the long run.

    Just like unchecked carbon emissions will cause icebergs to melt, says Buffett, unchecked greenback emissions (US dollar printing) will certainly cause the purchasing power of the currency to melt. Despite the fact that the US economy appears to be on a slow path to recovery, the cause for concern is the enormous dosages of 'monetary medicine' that continues to be administered, which is creating an annual deficit in the US of alarming high levels. While most of the effects of these actions are still invisible, their threat can be as disastrous as that posed by the financial crisis itself.

    Buffett suggests that to avert such a disaster, the US government must end the rise in the debt-to-GDP ratio and bring US growth in debt back in line with the growth in its resources. This is because even if a big part of this debt were covered by foreign investors and by Americans saving substantially more than they have done in a long time, he estimates the US Treasury would have to find US$ 900 bn to finance the remainder of the debt it is issuing.

    If not, Buffett forbids that the US runs the risk of becoming a 'banana republic', a term that is used to describe a country that is politically unstable and whose economy is dominated by foreign companies and depends completely on one export (such as bananas) for its livelihood.

    China's stockmarket set for a rebound
    China has seen an alarming drop in its stock market in the last two weeks, and the effect seems to have been spilling over to the Indian stocks as well with markets here too performing quite poorly (though Indian markets have also been impacted by monsoon worries). The Shanghai Composite index fell yesterday to almost 20% below the high it made on August 4th this year on the back of some disappointing earnings and apprehensions that the Chinese government will restrict lending in the country.

    But that is set to change if one were to believe Merrill Lynch, whose experts have indicated that Chinese stocks are set to make a comeback from this month's plunge on the likelihood that earnings will beat estimates and policy makers will maintain bank lending. The earnings surprise on the upside will be followed by a round of earnings upgrades, pushing the market back into action. Well, if indeed this were to happen, it would be great for the markets back home in India too, helping alleviate a part of the deficit monsoon induced worries pulling the markets down.



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