Warren Buffett says he sees the economic slide ending, but won’t put a timetable on recovery.

He believes Treasury Secretary Paulson and Fed Chairman Bernanke acted honorably and intelligently when they forced Bank of America to close the Merrill Lynch acquisition. Considering the fragile situation at the time, had Bank of America been allowed to invoke a major adverse change clause and back out, it may have been disastrous for the financial system. And although they have sympathy for Wells Fargo’s complaints about being forced to accept TARP money against its will, by and large they believe the government handled the financial crisis well.

Inflation: The aggressive stimulus policies will have consequences, and might produce inflation. The US borrows from the rest of the world and will have an incentive to reduce the cost of that debt by inflating the currency. It is the easiest way out, and therefore the most likely. Incidentally, US revenue from taxes this year is going to be lower than last year; and so the people actually paying for the AIG bonuses and all those other expenditures we had recently are the Chinese and other foreigners who are buying US government bonds. They will see their purchasing power erode, perhaps substantially. The impact of foreign exchange rates is unclear since other countries are doing even worse than we are, running even larger deficits per GDP in order to offset falling demand.

Future of the world’s economy: While Buffett has no idea what the near future holds, he believes that, over time, people will live better. We are able to produce today much more than our ancestors did, even though they had the same inherent intelligence and natural resources we have. But our system unleashes human potential and that process has only just started. There will be greed and fear, but the trend will be improving. Despite all the horrors of the 20th century, with two world wars, political turmoil, a Great Depression and several recessions, US standard of living improved sevenfold. Our enormous human potential will generate much more progress, despite occasional hiccups.