Warren Buffett, Chairman and CEO of Berkshire Hathaway, addressed concerns about the national debt at the company’s annual shareholders meeting on Saturday. The multi-billionaire eased tensions by asserting, in no uncertain terms, that the United States will never default on its debt. Here’s why.
Why are people worried about the debt right now?
In response to the coronavirus pandemic, which has ground the economy to a sudden halt, the federal government is spending trillions to support individuals and, in some cases, bail out whole businesses small and large.
All of this spending has racked up a colossal tab. Over the last three months, the U.S. Treasury accumulated $3 trillion of debt. For context, the U.S. only borrowed $1.8 trillion after the 2008 financial crisis. To bear the cost of such immense spending, the U.S. has sold bonds to foreign and domestic buyers, spreading its debt over a number of lenders and a number of years.
Why Won’t the U.S. Default?
A shareholder at this weekend’s Berkshire Hathaway meeting asked Mr. Buffett about the risk involved with the U.S. borrowing such large sums of money. In response, he assured the questioner that there is absolutely no risk of default because the bonds are in American currency.
“If you print bonds in your own currency, what happens to the currency will be the question,” said Buffett. “But you don’t default. The U.S. has been smart to issue its debt in its own currency.”
Buffett contrasted the debt incurred by an individual with the debt that a national government can accumulate; a government has the ability to print more money. As former Federal Reserve Chairman Alan Greenspan once put it, “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
Had the U.S. promised to repay its debt in the currency of its lenders, it might be in deeper trouble, as the government of Argentina has already learned. It owes multiple lenders in currencies it does not have the power over. Should those currencies become more valuable than its own, Argentina will face difficulty paying-back its loans. Buffett predicts that “lots of competent countries will have that problem in the future.” But he is optimistic that the U.S. can make good on its debts, because it owes all of them in United States dollars.
Still Room for Concern
Even if there is no chance that the U.S. will default on its loans, there is danger in over-printing large amounts of money quickly. Such a panic print would greatly decrease the value of the American dollar, cause rapid inflation and exacerbate the recession. It’s basic supply-and-demand: if you increase the amount of dollars in the economy, each one will be worth less.
Any inflation caused by the over supply of money in the economy can be controlled by tools available to the Federal Reserve. Still, it’s reassuring to know from Warren Buffet that the U.S. won’t be in debtors prison anytime soon –