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The Debt Ceiling Isn't What Worries Warren Buffett

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.

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  1. Double Ducks | January 22, 2013

    Well Mr. Buffett, there are quite a number of people who if they did not need to worry about food, education, healthcare, or retirement, would not work a day in their lives (they already do not need to worry about shelter with subsidized housing – too bad so many in the prime of life are taking these subsidized units from the elderly and disabled, for whom they were intended). Dear readers, realize that Mr. Buffett has all the wealth he and his extended family could want – but that money is no good if the economy is destroyed, if the US dollar is rendered worthless. This is what he fears (as it would make him poor too) and the reason he shows no hesitation to call on higher taxes for the middle class.

  2. Darryl Hanson | January 22, 2013

    I think Mr. Buffet is drinking Obama's Cool Ade. Just because Buffet made a lot of money in the markets doesn't mean his head is on stright. Everybody knows, or should know, that taxing wealth reduces the incentive to create new businesses and Jobs. Actually, taxing the the rich and make them pay their "Fair Share" will see a flight out of the USA just like what is now happening in France. In the USA, the rich already support the lazy loafers and those who have "OBAMAPHONES."

    Interest rates have been low Mr. Buffet and that hasn't helped the economy one bit. Stimulus hasn't either because the banks are keeping what they receive from the Fed and are not lending it out. So Warren Buffet, take your liberal money along with your left wing thoughts and stuff 'em!

    • Clintm15 | January 23, 2013

      It's the conservative GOP that removes regulations and allows banks to get away with this type of behaviour.

      Warren and his 'liberal' ideas have lead him and Bill Gates (another liberal) to be more successful and wealthy than any conservative.

      • William Novak | January 24, 2013

        Amassing a fortune has little to do with being left or right wing in my opinion. If you ever have the opportunity to know one who has amassed a fortune you will find that most are driven to the extreme in their quest for wealth by their unique personalities not their political persuasion.

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