The U.S. Treasury is borrowing $3 trillion in three months to pay for the pandemic response, a record sum that dwarfs the $1.8 trillion borrowed in 2009 during the financial crisis. The debt will be sold in bonds to a variety of foreign and domestic investors.
At the 2020 Berkshire Hathaway Annual Shareholders Meeting on, which was closed to the public due to Covid-19 but livestreamed on Yahoo Finance, billionaire investor Warren Buffett carefully explained in simple terms why the U.S. will never default on its debt.
When a concerned shareholder asked him whether there was a risk, he didn’t prevaricate, but started with a “no.”
“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.”
Other countries don’t do this, Buffett pointed out.
“Argentina is now having a problem because the debt isn’t in their own currency, and lots of countries have had that problem,” he said. “And lots of competent countries will have that problem in the future.”
Over the years, many have worried about the growing national debt as tax cuts and spending have created an ever-widening gap between revenue and outflows. But in his explanation, Buffett highlighted the distinctions that make the U.S. Treasury much different than your personal checkbook.
Mainly, the government owns the printing press to pay the money to the holders of its debt.
“It is very painful to owe money in somebody else’s currency,” said Buffett. “If I could issue a currency Buffett bucks, and I had a printing press and I could borrow money, I would never default.”
This is a common refrain of Modern Monetary Theory as well as longtime Fed Chair Alan Greenspan, who once said something similar: “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.”
The chief worry about just printing money to pay obligations is inflation.
“What you end up getting in terms of purchasing power can be in doubt,” Buffett said.
But whether the U.S. can pay the dollars that it owes is not in doubt. The Oracle of Omaha noted back to when Standard & Poor’s downgraded the U.S.’s credit rating in 2011.
“To me that did not make sense,” he said. “How you can regard any corporation as stronger than a person who can print the money to pay you, I just don’t understand. So don’t worry about the government defaulting.”
Buffett then addressed the frequent government shut-downs that happen over partisan arguments about raising the debt ceiling.
“I think it’s kind of crazy incidentally…to have these limits on the debt,” he said. “And then [the] stopped government, arguing about whether it’s going to increase the limits. We’re going to increase the limits on the debt.”
Buffett pointed out that the debt “isn’t going to be paid, it’s going to be refunded,” and referenced the period in the 1990s when the debt came down and the country simply created more.
“When the debts come down a little bit, the country’s going to print more debt. The country is going to grow in terms of its debt-paying capacity,” he said. “But the trick is to keep borrowing in your own currency.”