Is Warren Buffet Right About Inflation?

Warren Buffet agrees with me that higher inflation is in our future.

I wrote about this likely outcome in February of 2008.  See what i had to say then and what Buffet had to say recently below.  Then read what I say about Buffet’s incorrect presumptions about the future;

2/28/08 – Doug Eberhardt

Which Would You Prefer, Higher Taxes or Higher Inflation? Guess what folks?  You’re getting both….

5/2/09 – Warren Buffet

Buffett: Bailout Costs to be Paid Through Inflation

Berkshire chairman says taxpayers aren’t paying more

When I wrote that article in 2008, it was well before the bailouts of AIG, Fannie, Freddie, and the failure of many banks.  As many of you now know, things have not turned out any better.  In fact, we’re trillions more in debt now than we were then.

Warren Buffet understands that the effect of all this additional government spending (added to the current trillions) can only be paid for with higher taxes and/or higher inflation, but his statements during that Berkshire Hathaway meeting were rather presumptuous.

From the article above;

Buffet rejected the idea that U.S. taxpayers are paying more to fund bailouts of financial-services companies and the large economic stimulus package, noting that taxes in the U.S. haven’t been raised for many years.

It may be true that U.S. tax payers haven’t had their taxes raised in the last few years, but many are going to pay more in the years to come.  There are plenty of signs that show how state governments like California for example are already asking voters to approve more taxes. This is only the beginning.

But back to more from “Oracle of Omaha” on inflation from the notes of his annual meeting:

Inflation is unpredictable. But over the next 5, 10, 15 years the dollar will buy less or substantially less.  That said a little inflation is not bad, just look at the last few hundred years.

Well Warren, 80% of the “last few hundred years,” the U.S. was on a gold standard or actually had gold as money.  It was only with the creation of the Federal Reserve that we were introduced to inflation and it has only proceeded to get worse since the decision by Richard Nixon in 1971 to tell the world our currency is no longer backed by gold and just trust that piece of paper called the dollar, we’re good for it.

What’s happened in the last 38 years sans gold?

Well, there was a run on the dollar in 1979 that was only stopped by increasing interest earned on dollars.  There was the mid to late 80′s Savings & Loan crisis.  And now we literally have trillions upon trillions of more debt and higher prices for gas, groceries, cars and everything else.

In reality, t is the blind faith that a piece of paper with some ink on it will be exchangeable for gas, groceries or a car that matters most.

There will be higher inflation, Warren and I agree on that.  We don’t agree to what extent that will affect you, and we don’t agree that you won’t be paying more in taxes.  You will.  Whether they are sales taxes or state income taxes, one way or another, you’ll have to dig deeper.

Because we know that inflation is in our future, your investments better be hedged with gold in preparation for this tidal wave of inflation.

Related posts from the Fed Up Blog:

1. Which Would You Prefer, Higher Taxes or Higher Inflation?
2. The Demise of GM and How the U.S. Is On the Same Course “As GM Goes, So Goes the Nation”
3. Social Security Will Be There For You, However…
4. Challenging Financial Advisors on the Need to Diversify Into Gold