Monday, 04 Mar 2013 10:49 AM

By Glenn J. Kalinoski

The U.S. economy might be “dead in the water” without the stimulus provided by the Federal Reserve under Chairman Ben Bernanke, according to Warren Buffett, CEO of Berkshire Hathaway.

“I think very cheap money makes things happen, it makes asset values higher. When asset values are higher, people do have a greater propensity to spend,” Buffett told CNBC.

“I think Bernanke has sort of carried the load himself during this period.”

Buffett said he believes Bernanke thinks that without the Fed’s stimulus, the U.S. economy would be “dead in the water.”

“I think there's some chance he's right on that,” he maintained.

Buffett noted that because interest rates are essentially zero, equities are higher. Major U.S. stock indexes are flirting with all-time record highs.

“There’s no question that stocks are higher — because interest rates are essentially zero — than they would be otherwise,” he said. “There’s no question that there’s even more activity on buying companies because you can borrow money so cheap. Junk bonds are ridiculously cheap. So [Bernanke is] having an effect.”

Bloomberg News reported last week that Bernanke has “pushed back” against colleagues on the Federal Open Market Committee who want to curtail the $85 billion in monthly bond-buying amid concern about the growth of the Fed’s record $3.1 trillion balance sheet.

“Everybody that’s involved in managing money is waiting for the moment when they think he’s going to go the other direction,” Buffett said. “I’m sure he’s going to try to do various things to sort of ease that in.”

The Fed will give some type of warning about when rates will rise, Buffett explained. “I think the Fed will try to give little signals here and all of that. But in the end, there are an awful lot of people who want to get out of a lot of assets if they think the Fed is going to tighten a lot.

“And you could see a big reaction.”

Buffett hasn’t done anything differently to prepare for a change in Fed policy.

“We’ve never had a discussion of macroeconomic factors of whether to buy ourselves securities. It just doesn’t get into our consideration,” he said, adding that Berkshire has plenty of cash on hand to weather any problems that come along.

“We think the important thing is to be in the right business at the right price.”

Buffett believes the federal deficit will be reduced, stating, “We’re going to bring down spending and bring up revenues. We may get there in fits and starts … but the deficit is going to come down. It needs to come down and it will come down.

“We may be doing it in a ‘meat-ax’ way in terms of revenue going up. At the start of the year, when we increased the payroll tax a couple percent, that hit all across the board. It was a lot of money. Roughly an equal amount of the sequester.”

Buffett explained that the sequester is going to decrease government stimulus.

“I think it could go on for quite a while,” Buffett said.

“The sequester, in effect, reduces the amount of stimulus to the economy. Stimulus is when the government operates at a significant deficit. We’re operating at a $1 trillion deficit roughly. The sequester reduces that a little bit. But we’re still operating at a deficit that is 6 percent of [gross domestic product].”

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