By Porter Stansberry in the S&A Digest:
I think Warren Buffett made an insightful observation on Charlie Rose's talk show last week:
Charlie Rose: This question is asked frequently: Will at some point the deficit and the debt and the decline of the dollar get to a point that people who hold our debt will no longer want to buy and then we're in a crisis?
Warren Buffett: We cannot keep running fiscal deficits like we are currently without having a lot of consequences over time... If you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.s in effect to the rest of the world, that leaves another trillion. And you know, the domestic savers are not going to come up with a trillion... so these numbers are unsustainable over time, what we're doing. It is true, though, that if you keep flooding the world with your debt and people see your fiscal policies are sort of out of control, they're going to get less and less and less enthused about your debt. And then, one of two things happen. Either you keep paying more and more to roll over that debt or you start monetizing it like crazy...
What Buffett didn't say here might be even more important than what he did say: The Federal Reserve has already begun to buy Treasury bonds on a large scale (monetizing the debt). In fact, the Fed has said it will buy $1.75 billion of mortgages and Treasury bonds to manipulate interest rates lower.
In the short term, this buying will make it painful to bet against the bond market. But we are paying a terrible price for this manipulation.
A lower currency devalues all of the assets in America and all of the government bonds outstanding... which could cause our foreign bondholders to dump the dollar en masse.
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