On Warren Buffett’s New York Times Op-Ed

Ponzi finance units must increase its outstanding debt

 in order to meet its financial obligations.

 

 A transition occurs over the course of an expansion,

as increasingly risky positions are validated by the booming economy

that renders the built in margins of error superfluous,

 encouraging adoption of riskier positions.

 

 Eventually, either financing costs rise, or income comes in below expectations

leading to defaults on payment commitments.

 

 Hyman Minsky

 

The Greenback Effect

 

...If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

 

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent.

 

…An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money.

 

…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.

 

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.”

 

…We don’t want our country to evolve into the banana-republic economy described by Keynes.

 

…Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

 

…Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.

 

The dollar’s destiny lies with Congress.

 

Warren Buffett

New York Times, August 19, 2009

 

If a nation prints more money, like cutting a 16 inch pizza into 12 slices instead of 8, is each slice worth less?

 

What if the pizza shrinks while the number of slices rise?

 

The decline of great powers

is caused by simple economic over extension

 

Paul Michael Kennedy

The Rise and Fall of the Great Powers