Debt Dangers - When Warren Buffett looks safer than Uncle Sam

Chicago Tribune
March 29, 2010

For many decades, U.S. government securities have been the epitome of safe, dull investments. If you wanted to be absolutely positive you'd get your money back and then some, Treasury bills were the way to go. Right now, lots of Americans who put their money into big mortgages or stocks a decade ago wish they had gone the more mundane route.

But it's mundane no more. With federal budget deficits running wild, investors are growing uneasy at the idea of lending money to an institution that seems unable to stop spending beyond its means. Last month, something extraordinary happened: Two-year bonds offered by Berkshire Hathaway Inc. commanded lower yields than those offered by the U.S. government. As Bloomberg.com put it, "The bond market is saying that it's safer to lend to Warren Buffett than Barack Obama."

That may sound common-sensical — Buffett has experience at meeting payrolls, while Obama does not — but it's actually a surprising perception. Berkshire Hathaway, after all, conceivably could make so many mistakes that it runs out of money and closes down. But the U.S. government is not about to run out of money, even if it keeps overspending.

Why not? First, it can appropriate more of its citizens' earnings through the tax system. Second, and more important, it can print money to pay its bills. Warren Buffett doesn't have those options.

So it's hard to see why investors would be leery. Well, actually, it's not so hard: The federal government is digging itself deeper into debt every month and intends to keep doing so indefinitely.

The nonpartisan Congressional Budget Office offers a prognosis: "Under the president's budget, debt held by the public would grow from $7.5 trillion (53 percent of GDP) at the end of 2009 to $20.3 trillion (90 percent of GDP) at the end of 2020." Interest payments would quadruple.

The long-term problem here is not that the government eventually would default on its obligations. The danger is that it would create money to make those debts payable, a course that would lead to much higher inflation. Then, yields on even impeccable corporate bonds would climb with those of T-bills.

The economy would also suffer as businesses and households scrambled to cope with the disruptive effects of soaring prices. It would suffer again if and when the government decided to curb inflation by driving up interest rates — a step that virtually guarantees a sharp downturn.

Frightened investors may be wrong to think they're less likely to get their money back from the government than from Buffett's Berkshire.

But they're not wrong to be frightened.

Boehner says federal debt will equal GDP in two years

"Our national debt ... is on track to exceed the size of our entire economy ... in just two more years."

John Boehner on Wednesday, March 24th, 2010 in an op-ed in the Des Moines Register

St. Petersburg Times PoliFact
March 26, 2010


Ever since Barack Obama became president and began advocating such big-dollar federal programs as an economic stimulus and health care reform, Republicans have gained increasing political traction with warnings to voters about the growing national debt.

On March 24, 2010, House Minority Leader John Boehner, R-Ohio, published an op-ed in the Des Moines Register that was timed to coincide with a March 25 visit by Obama to Iowa City, Iowa. Obama visited Iowa City to tout the health care bill two days after signing it into law.

Boehner's column -- titled, "Why Republicans will fight to repeal health-care takeover" -- was a broadside against the newly signed bill, featuring a wide range of statistics. In it, he asserted that the health care bill "is a recipe for further fiscal disaster at a time when our national debt ($12.7 trillion today) is on track to exceed the size of our entire economy (about $15 trillion) in just two more years."

That struck us as a huge amount, so we decided to take a closer look.

First, we'll offer a reminder that the debt is different from a deficit. A deficit refers to the amount by which expenses exceed revenues in a single year. The debt -- which is what Boehner was referring to -- refers to the cumulative total of past deficits, minus any intervening surpluses.

To sort out whether Boehner's numbers are right, we turned to the extensive historical tables in the president's fiscal year 2011 budget proposal.

According to these figures, which come from the Office of Management and Budget, the gross federal debt by the end of fiscal year 2010 is projected to be almost $13.8 trillion. That's actually a bit more than Boehner had suggested.

Two years later -- by the end of fiscal year 2012 -- the debt is projected to rise to $16.3 trillion, also higher than Boehner had indicated.

But Boehner is correct that, measured by the share of gross domestic product, gross federal debt will reach a significant milestone in two years. By 2012, gross federal debt is projected to be 100.8 percent of gross domestic product, up from 99.0 percent for fiscal year 2011.

These numbers, we'll add, have been growing for decades, roughly tripling since Jimmy Carter left the presidency. Under Ronald Reagan, debt as a percentage of GDP grew from 33.4 percent to 51.9 percent, and under George H.W. Bush, it grew from 51.9 percent to 64.1 percent. It declined under Bill Clinton, from 64.1 percent to 57.3 percent, before rising from 57.3 percent to 69.2 percent under George W. Bush. It's expected to soar during Obama's first four years from 69.2 percent to 100.8 percent.

It's worth noting that there is an alternative measure of debt known as "public debt," which does not include money in the Social Security trust fund or other amounts that the government owes itself. Measured this way, the debt-to-GDP comparisons are much smaller. By the end of 2010, public debt is projected to be 60.3 percent of GDP, and by the end of 2012, it's projected to be 66.6 percent.

Some economists prefer to use public debt rather than gross federal debt, but one measure "isn’t more 'right' than the other – they are just looking at different things," said Marc Goldwein, policy director for the Committee for a Responsible Federal Budget, a middle-of-the-road budget-hawk group. "Boehner may be cherry-picking, but I don’t think he’s misrepresenting in any way."

It's also worth noting that these numbers are only estimates. They could change over the course of the next two years, depending on economic conditions and policy choices. Still, we consider Boehner's statistics valid. While he underestimates the size of the projected debt in 2010 and 2012, his assertion that "our national debt ... is on track to exceed the size of our entire economy ... in just two more years" is on target, according to the president's own Office of Management and Budget. So we rate his statement True.