In Op-Ed Buffett Warns of 'Greenback Effect'

In an op-ed piece in the New York Times today, billionaire investor Warren Buffett said the U.S. economy is now out of the "emergency room" and appears to be on a slow path to recovery, but he also warns that every action has consequences - a phenomenon he called the butterfly effect.

Buffett warns of potential problems with the greenback, or U.S. dollar, due to all the stimulus money and liquidity added to the system. Although Buffett applauds the government for reacting as the financial system was on the brink of a collapse, he warns "enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects."

Buffett said that fiscally the U.S. is in uncharted territory with the deficit rising to about 13% of GDP, or more than twice the non-wartime record of 6%. Buffett said because of the mounting deficits, the country's "net debt" is mushrooming and will climb to 56% of GDP this year.

Buffett warns that even with borrowing from foreign countries like China and our own citizens, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. He foresees "Washington's printing presses will need to work overtime."

He said slowing down the printing presses will take extraordinary political will, and major changes will be needed in both taxes and outlays to account for a government expenditures now running 185% of receipts. Buffets said once recovery is gained, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with our growth in resources.

Buffett concludes "Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar's destiny lies with Congress."

Link to Bufftett's NY Times Op-Ed

Traders may want to keep an eye on ETF SPDR Gold (NYSE: GLD) on the article. An argument could be made that it could go down because Buffett could gain the ear of Congress and they could slow down spending. Another argument suggest that Congress will do nothing and the out-of-control spending will continue and create eventual inflation, thereby sending gold higher.

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