Billionaire investing juggernaut Warren Buffett isn’t worried about the debt ceiling so much as some of the other issues that this country is facing.
Over the weekend, Buffett mentioned that the $16.4 trillion worth of debt the US currently has isn’t something that most people should be focused upon.
“It is not a good thing to have it going up in relation to GDP, that should be stabilized, but the debt itself is not a problem,” said Berkshire Hathaway CEO to CBS Sunday Morning over the weekend.
Buffett mentions that the US debt is a “lower percentage of GDP than it was when we came out of World War II. You’ve got to think about it in relation to GDP.”
Here’s why Buffett pays attention to debt to GDP.
Why Debt to GDP Matters
The ratio of debt to GDP is how we measure the United States’ federal debt as it relates to the country’s gross domestic product. When you compare what the US produces to what it owes, this ratio tells us its ability to pay back its debts. The higher the ratio of debt to GDP, the riskier it is that the country will default.
This ratio matters because:
- The rating agencies like Moody’s, S&P and Fitch use debt to GDP ratios as a way to determine if a country is credit worthy.
- When someone purchases a country’s debt, they do so under the impression that the money will be paid back on time.
- When an economy is thriving, a debt to GDP ratio of an elevated level isn’t a major issue because future earnings show that the country will be able to pay back the money quickly. If an economy is stagnant, a high debt to GDP ratio is a major red flag.
- If the country in question does not have a plan in place to handle the high debt to GDP ratio, it will increase the risk of default and lead to downgrades in their credit rating, it will tarnish their reputation and reduce debt sales.
Since the US recently hit the debt ceiling on December 31, it is now operating on emergency funds from the U.S. Treasury Department until they raise the debt ceiling. In the meantime, the debt to GDP ratio is on the rise.
At the current time, the debt to GDP ratio is roughly around 100%. You can compare this to World War II when the US’s ratio was about 109%.
Buffett’s Take on Congress
Now we will take a look at what Warren Buffett believes is the biggest problem that America faces: Congress.
Warren Buffett was very critical of how Congress handled the fiscal cliff issue, and he encouraged the Republican Party to “put country before party” in order to come to an agreement.
Congress has the ability to reduce the United States’ high debt to GDP ratio by spending cuts at the federal level and by increasing taxes. But they need to implement these measures in a way that will not suspend growth. If they encourage growth by lowering interest rates, they will implement another very effective way to lower the debt to GDP ratio.
Warren Buffett is very supportive of the highest-paid American earners paying higher taxes – and obviously he is among them – and this is especially beneficial as a way to help those who are less fortunate.
Buffett mentioned on Sunday, “I would say in a country with $50,000 of GDP per person, that nobody should be hungry, nobody should lack a good education, nobody should be worried about medical care, you know, nobody should be worried about their old age.”
Warren Buffett is actually optimistic that the issues in Washington will get better as we move forward.
“What is right about America just totally dwarfs what’s wrong with Washington,” said Buffett. “535 people are not going to mess up 315 million over time. I know it.”
I think Buffett might be a little bit off base. Even though he made a lot of money on the stock market, does not mean he has all the answers. Most people either know or should know that taxing the wealthy takes away any incentive to create new jobs and businesses. In actuality, taxing the rich and asking them to pay their “fair share” will scare these businesses right out of the United States of America, like it is currently happening in France. In the United States of America, the rich already support those less fortunate in many ways.
Even though interest rates have been very low, it really has not helped the US economy all that much. The stimulus has not provided much help either because the banks aren’t lending out the money received by the Fed, and they are just keeping it. A better plan needs to be made, and it should happen quickly.