Warren Buffett thinks that our government is playing a dangerous game of Russian roulette. While the country continues to struggle during our recent financial difficulties, our politicians in Washington continue stuck on their differences related to taxes and spending cuts creating a political impasse between Republicans and Democrats over what used to be a no-brainer: raising the statutory annual debt ceiling so the U.S. Treasury can meet the federal government’s ever-expanding financial obligations. With the deadline approaching both sides remain far from an agreement.
It is truly silly that our government continues to waste time on this matter, in past governments this would not have been such a long battle. For example, Congress raised the debt ceiling seven times during the George W. Bush administration. Now our politicians are using it as a hostage to get their way. Understand that the United States does not have to default on its obligations as long as we honor the interest on our obligation, the United States will be able to issue new bonds to replace those that come due without breaching their commitments. The Treasury itself still holds about $100-billion worth of mortgage-backed securities from Fannie Mae and Freddie Mac, as well as close to $400-billion in gold that it could sell or swap with the Federal Reserve, to raise emergency cash.
Failure to raise the debt ceiling would not trigger a major crisis on a short term. However, in the longer term, any kind of U.S. default will create a lack of confidence among investors regarding our financial instruments.
Worst-Case Scenario
1. Congress doesn’t raise the $14.3-trillion debt ceiling by Aug. 2.
2. U.S. Treasury is unable to make a $30-billion debt payment due on Aug. 4.
3. The U.S. credit rating is cut, and investors demand higher interest rates to hold U.S. debt.
4. The government is forced to pay billions more to borrow money.
5. Government spending is reduced, slowing the economy.
6. Consumers and businesses, forced to pay higher interest rates to borrow money, cut back.
7. Foreign investors flee U.S. securities, the dollar devalues, and inflation soars.
8. Stocks plunge amid a widespread loss of confidence.
What do you think we should do?
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