“During the decade ending in 2021, the United States Treasury received about $32.3 trillion in taxes while it spent $43.9 trillion. Though economists, politicians and many of the public have opinions about the consequences of that huge imbalance, Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless…..Berkshire offers some modest protection from runaway inflation, but this attribute is far from perfect. Huge and entrenched fiscal deficits have consequences.”
~ Berkshire Hathaway Newsletter to Shareholders, 2022
Comments
There are three potential sources of funding for fiscal deficits of which two are inflationary:
- The private sector. Deficits funded by the private sector have no impact on inflation. The rise in public spending is offset by a decline in private spending/increase in savings.
- Commercial banks. Inflationary. The bank simply swaps one asset on their balance sheet for another: bank reserves at the Fed are exchanged for Treasury securities. Public spending rises but is not offset elsewhere.
- Foreign investors (including banks). Inflationary. Public spending rises but there is no offset. The inflow on capital account is matched by an outflow on current account.