2011: How will government spending affect the stock market and economy?

AUDIENCE MEMBER: Mary Broderick, Berkeley, California. Good morning, Mr. Buffett. Good morning, Mr. Munger. And a big thank you. You probably aren’t aware of this, but you’ve been my personal financial and investment advisors for years.

I would like to know what you think the effect of the government ending the POMO program mid-July this year will have on the stock market and the economy in general.

WARREN BUFFETT: The government ending the — QE2 or —

AUDIENCE MEMBER: Permanent open market operation.

WARREN BUFFETT: Well, you’re one acronym ahead of me. (Laughter)

The — well, just as we’re discussing it now, it’s no secret what they’re going to do.

I mean, it’s sort of the most advertised open market purchase in history, and probably in terms of defining the amount per month and when it comes to an end, you know, what the balance sheet will look like at the end of the Fed.

So I don’t think — you know, if something is that well known by all participants in a market, I think any effect of it has been discounted by this point in time.

I mean, if you say you’re going to increase tax rates in a year, we’ll say, on corporations or decrease them or whatever it may be, and it’s really done and locked in stone, the market doesn’t wait until the date when the tax increases or decreases go through to build that into market prices. So I don’t — I see no reason — there may be some other things that happen then — but I see no reason why simply having that program come to an end will cause any significant change in stock or bond markets at that time.

You know, obviously, a huge market force will be withdrawn.

I mean you buy $600 billion worth of Treasurys and, you know, you probably leave a few traces along the way that you’ve done it. And it has been 100 billion or so a month, and that purchasing will not be in the market but the government issuances of debt will still be at a level that are consistent with what they are now.

So it will be a different market, but I think it’s a different market that’s already been anticipated.

Charlie?

CHARLIE MUNGER: I have nothing to add. (Laughter)

WARREN BUFFETT: Yep.