Buffett: We do not need to overhaul the economic system

Warren Buffett recently put out his annual shareholder letter (careful PDF), which is full of his usual wit even in these pessimistic times. Berkshire Hathaway lost 9.6% this year, but they still beat the S&P 500 by 27.4%. He thinks that now is a poor time to hold onto cash:

Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – fact, almost smug – in following this policy as financial turmoil has mounted. They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.

I find it difficult to see how inflation is not going to become rampant. How else is the government going to purge the deficit from $1.5 trillion in 2010 to $533 billion in 2013? And if inflation is the probable future, then by leaving your assets in cash you would be losing money.