US debt downgrade could mean trouble ahead. We should heed the warnings
Can we dodge inflation, keep employment strong and continue to grow?
The Cow Guy Group founder Scott Shellady analyzes the 'nervous' stock market and BNP Paribas USA Vice Chairman Jean-Yves Fillion reacts to Fitch stripping the U.S. of its AAA rating on 'The Claman Countdown.'
Recently Fitch’s, a service that rates the quality of bonds, downgraded U.S. Treasuries from AAA to AA+.
Bad news, right? I mean if your credit score went down wouldn’t you be at least a bit worried – especially if you were about to shop for a new car? Of course.
And so shouldn’t you worry that your government – which every day borrows enough money to buy about 82,000 new cars – is seeing their credit score go down? Yeah, you should.
Fitch Ratings logo is seen on its building in New York City on Oct. 25, 2022. (Jakub Porzycki/NurPhoto via Getty Images / Getty Images)
But you know who doesn’t seem worried? Warren Buffett. On Thursday he gave an interview in which he said:
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"Berkshire (his investment firm) bought $10 billion in U.S. Treasuries last Monday. We bought $10 billion in Treasuries this Monday. And the only question for next Monday is whether we will buy $10 billion in 3-month or 6-month" He went on to say, "The dollar is the reserve currency of the world, and everybody knows it."
Being rich and being smart are not the same thing – unless your name is Warren Buffett. And so maybe we can ignore that queasy feeling and get on with business as usual. If Warren thinks we’re good, aren’t we good?
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Maybe. But remember, being rich and being careful are also not the same thing – unless your name is Warren Buffett. Mr. Buffett’s answer was very careful. And so maybe we should think about what he said and – more importantly – what he did not say.
What he said is that Berkshire is going to continue buying short-term Treasuries, debt that matures in less than one year. This means he’s not worried that Fitch’s downgrade will matter much to the quality of these short-term investments. No financial apocalypse between now and Christmas.
And why does he think that? Because "The dollar is the reserve currency of the world, and everybody knows it."
"The dollar is the reserve currency of the world, and everybody knows it," Warren Buffett said. (Reuters/Rick Wilking/File Photo/File Photo / Reuters Photos)
That last bit is important. The fact that the dollar is the reserve currency means that a huge volume of big international deals is negotiated in dollars. More importantly, it means that almost every other country holds big balances of dollars and U.S. Treasuries to help stabilize their own currency and smooth these dollar-denominated deals. At last count there were about $9 trillion of dollars and U.S. Treasuries in the pockets of foreigners. In other words, the world has no choice but to continue loaning us money.
But should we continue borrowing that money? Mr. Buffett did not say, but in the past, he’s made it quite clear that the U.S. needs to live within its means. He’s even gone so far as to propose a law saying that no member of Congress can stand for re-election if the deficit is more than 3% of GDP. Had such a law been in effect, the last member of Congress who could have stood for another term would have been voted in during the Obama administration.
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The Congressional Budget Office projects that federal deficits will approach or exceed 6% of GDP – twice Mr. Buffett’s threshold to fire the entire Congress – every year for the next 10 years. (And that, by the way, is without any major recession or other crises.) The total debt, which averaged less than half of GDP for the second half of last century, will be almost double GDP by 2053. We will spend more on interest payments than on national defense.
Fitch’s downgrade doesn’t mean were about to default. It does mean we’re looking like a country that can’t be depended on. Does that mean we’ll lose our status as a reserve currency? Who knows.
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Remember the old joke about the hiker who, when challenged by an angry bear found comfort in the thought that he didn’t have to outrun the bear, he just had to outrun his buddy. Maybe the world will mess things up even more than us, no one will step up to take over the role of the U.S. dollar and we’ll be OK.
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But even then, will we really be OK? Can we dodge inflation, keep employment strong and continue to grow? It’s hard to do all that at once.
It seems inevitable given the way things are going that debt becomes an overwhelming burden and an unavoidable obsession. Mr. Buffett didn’t say that there’s a bear coming down the trail. Fitch’s did. Let’s get ready.