Saturday , 23 September 2017

Buffett, Russell and Hoisington: Deflation or Inflation?

“Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.” says Warren Buffett. Words: 982

In the following edited excerpts from the original article* Cam Hui ( puts forth the case for both inflation and deflation by the likes of Richard Russell, Warren Buffett and Van Hoisington:

The Case for Deflation

1. De-leveraging
There are many analysts making the case for a Japanese 1990s style prolonged period of deflation. One of the more prominent spokesmen of this view is Hoisington Investment Management. Simply put, Hoisington believes that we are in a de-leveraging cycle, and de-leveraging means deflation. Their case for deflation can be summarized in the following way:

– US debt to GDP has gone sky high, indicating that borrowing capacity is stretched. Much of that borrowing went to pump up asset prices. Even though asset prices have fallen, the debt remains. The endgame is obvious: we need time to pay off all of the excess debt and that process is highly deflationary.

– Credit creation is falling dramatically. The economy cannot recover unless banks are willing to lend to businesses and households. Otherwise, where does growth come from?

– Monetary policy is pushing on a string. Inflation is considered to be a monetary phenomenon. When Helicopter Ben prints too much money, theory suggests that too much money chasing too few goods and services ignites inflation. Hoisington argues that increasing the money supply will not result in inflation because banks aren’t lending. All of the newly printed dollars are winding up in bank reserves and doesn’t get pushed into the real economy. Therefore inflation will stay tame until banks begin to lend again and start a new credit cycle.

– Fiscal stimulus won’t work either. One of the major problems on the expenditure side is that the government sector is smaller than the private sector. Moreover, increasing government spending would mean either the government must either raise taxes or borrow funds in the financial markets that would have otherwise gone to the private sector, which is counterproductive.

– The American consumer’s balance sheet is extremely weak and over-levered. It will be a while before the consumer can resume his profligate ways, assuming a new frugality doesn’t take hold. If the consumer doesn’t spend, then where will growth come from?

To the above points, I would also add the following:
– US capacity utilization is falling and capacity utilization leads core CPI by about a year, according to Albert Edwards of SocGen.

– The Eurozone won’t be a source of global growth near-term. Europe is undergoing its own de-leveraging cycle as widespread defaults from Eastern European loans become a reality.

(See the Hoisington case at

2. Too Much Debt
– Debt to GDP has gone sky high…Credit creation is falling dramatically…Consumer balance sheets are very weak, making them unlikely to spend. Capacity utilization is falling and capacity utilization leads CPI by about a year. Source: Societe Generale

The Case for Inflation

1. Massive Fiscal and Monetary Stimulus
In a New York Times op-ed (see _r=2&scp=2&sq=buffett&st=cse) Warren Buffett warned that:

– “enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.” Buffett was saying, in so many words, that all of the money being printed today is unlikely to ignite inflation because of the lack of lending. However, Americans will have to eventually pay the price for all this government spending and monetary stimulus.

– once we start to see signs of a recovery, “slowing [the stimulus] down will require extraordinary political will. 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.”

– the price to be paid would likely be an uncontrolled decline in the US Dollar: “Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.”

2. Falling US Dollar
The United States is in the enviable position of being the issuer of a major reserve currency. For central bank reserve managers, the only other realistic reserve currencies are the euro and perhaps the Yen. All other currencies are too illiquid to be serious contenders for major reserve status.

Given the profound troubles that Europe faces with its banking system and the continuing problems in Japan, the US Dollar is unlikely to fall significantly against either the euro or the Yen. Pressures on the US Dollar would show up as rising commodity prices – which translates to inflation.

3. Higher Interest Rates
Long-time analyst Richard Russell, publisher of the Dow Theory Letters since 1958, put the dilemma more succinctly:

– The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let’s say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof.

* (Qwest Investment Management Corp. is an investment firm which specializes in identifying, structuring and managing investment products focused in the natural resource sector.)

Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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