Investment guru Warren Buffett isn't sweating the debt ceiling as much as he is some of the country's other issues.
Buffett this weekend said the $16.4 trillion in debt the country has collected is not the number on which everyone should be focused.
"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," the CEO of Berkshire Hathaway (NYSE: BRK.A) told CBS' "Sunday Morning" this weekend.
Buffett said the country's debt is a "lower percentage of GDP than it was when we came out of World War II. You've got to think about in relation to GDP."
Here's why debt-to-GDP is what Buffett watches.
Why Debt to GDP Matters
The debt-to-GDP ratio is a measure of the country's federal debt in relation to its gross domestic product. By comparing what the country owes to what it produces, the ratio indicates the country's ability to pay its debt; the higher the ratio, the higher the risk of default.
The ratio matters because:
- Rating agencies, such as Fitch, S&P and Moody's, commonly use debt-to-GDP ratios to determine the credit worthiness of a country.
- Purchasers of a country's debt buy with the assertion they will be paid back on time.
- In a thriving economy, an elevated debt-to-GDP ratio isn't much of a concern since future earnings portend a country will be able to pay off its debts quickly. In a stagnant economy, a high ratio raises a red flag.
- Not having a feasible plan in place to address a high debt-to-GDP ratio increases the risk of default, which leads to credit downgrades, reduced debt sales and a tarnished reputation.
Since the United States technically hit the debt ceiling on Dec. 31, it is running on emergency funds from the Treasury Dept. until the debt ceiling is raised. Meanwhile, the debt-to-GDP ratio is climbing.
Currently the debt-to-GDP ratio is around 100%. That compares to around World War II when the ratio was about 109%.
Buffett on Congress
This brings us to what Buffett considers to be America's biggest problem: Congress.
Buffett criticized the way Congress handled the fiscal cliff fight, encouraging Republicans to "put country before party" to reach a deal.
Congress can reduce our country's high debt-to-GDP ratio by cutting spending at the federal level and by raising taxes. But these need to be implemented in ways that don't thwart growth. Encouraging growth, by trimming interest rates, is another effective way to lower the debt-to-GDP ratio.
Buffett supports higher taxes for America's highest-paid earners – he being among them – especially as a way to help those less fortunate.
Buffett said 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."
But Buffett is optimistic things in Washington will get better going forward.
"What is right about America just totally dwarfs what's wrong with Washington," he said. "535 people are not going to mess up 315 million over time. I know it."
For the latest on Washington's debt ceiling debate, check out our daily coverage here.
Related Articles and News:
- Money Morning:
What Happens If We Hit the Debt Ceiling?
- Money Morning:
Fitch's Warning on U.S. Credit Rating Downgrade
- Money Morning:
U.S. Debt Ceiling: Government "Borrows" Pension Funds to Avoid Default
- Huffington Post:
Warren Buffett: Congress Is the Biggest Problem Facing Obama in His Second Term
- CBS News:
Just a regular billionaire
Buffett: U.S. debt on its own "not a problem'