Inflation? Deflation? In these perplexing economic times it is hard to predict what might happen next. I certainly don't know. There are so many opposing forces pushing against each other it is hard to say which ones are strongest.
From the perspective of Warren Buffett, inflation is going to be the economic right cross to hit us next. According to this article on seeking alpha, Buffett has been banging the inflation drum for a few years. His reasoning is simple and not at all uncommon. He says that there are three ways for the government to deal with it's debt issues: 1) It can default, 2)It can raise taxes/reduce spending, 3)It can inflate its way out. Since the government's debt is in US currency, he doesn't see default as a viable option since the U.S. can simple print more money. He doesn't see the politicians raising taxes/cutting spending since these actions are unpopular and thus will damage their chances of re-election. With only one option left, he believes politicians will take the easy way out and resort to inflationary measures.
Back in February, I wrote this paper/blog entry considering the same three possible methods of dealing with the debt but came to the conclusion that it was more likely that the government would raise taxes/reduce spending rather than pursue inflationary measures. My reasoning was that the negative effects this sort of policy (rolled over outstanding debts and all future debts would have to be financed at higher rates to compensate investors for inflation)would be enough to persuade politicians to pursue the tax and cut option. Though I still feel this will be the predominant measure taken, I am a little less sure after witnessing the debt ceiling debacle we just went through. As Buffett predicted, during the debt ceiling debates neither side wanted to do what they thought would be politically harmful. Republicans did not want to increase taxes and democrats did not want to cut spending. I'm not trying to make a point here regarding the right amount of taxes vs. spending cuts, only that a great deal of political fighting resulted in very little action.
Since the passing of the debt ceiling bill, nothing has really changed. We still have a massive debt problem which could explode tomorrow or 30 years from now. So what are we going to do about it?