Posted July 3, 2020 by John Posey
Watching the government throw money at our economic woes caused by coronavirus through additional spending and tax relief beyond the normal, bloated national debt load, have you wondered if we should be concerned about the ability to pay it off someday? It certainly doesn’t seem sustainable, but who better to ask than Warren Buffett. He was posed this question at the annual 2020 Berkshire Hathaway meeting and his first response was a simple, “no.” You can read the full article here, but I’ll sum up what I took away from the discussion. Buffett went on to say,
“If you print bonds in your own currency, what happens to the currency will be the question. But you don’t default. The U.S. has been smart to issue its debt in its own currency.”
There was further discussion about how other countries don’t do this or may not be able to. Borrowing in foreign currency has led to problems for other countries such as inflation and the corresponding loss of purchasing power of their domestic currency. Some countries have also created policies to peg their currency against another country’s currency that is a stronger, more developed economy, but it doesn’t solve the challenge of setting an appropriate exchange rate and managing the resulting effects. If the exchange is set too high or too low it can an adverse economic effect on the country. So you may ask, why do some countries borrow in foreign currency? The short answer is they’re often forced to. Some country’s debt markets may not be adequate to satisfy their own borrowing needs, so they have to look elsewhere.
Fortunately for the U.S., we have the world’s most popular printing press at our disposal and the U.S. Treasury uses it. As you can imagine, the most developed and advanced economies have an extreme advantage in being able to dictate how they borrow money. Not to mention the U.S. dollar is viewed as the most stable, commonly used trading currency in the world. Now you should be feeling more patriotic if you weren’t already!
Do you remember when the rating agency, Standard & Poor, downgraded the U.S’s credit rating back in 2011? I guess they thought the U.S. was a little less Standard and a bit more Poor. But joking aside, here’s what they said at the time: “The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” Looking back almost ten years now, I can’t remember a time where we didn’t have some ongoing debate about fiscal and economic challenges. I’m not sure predictability and American policymaking belong in the same sentence now or ever! Here’s what Buffet had to say on the matter: “To me, that did not make sense. 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.” It sounds like as long as you control the most popular printing press the odds of default are virtually zero. I wish it worked that way with my Monopoly money in the real world!
This brings me to my last thought about printing more money – inflation. Increasing the monetary base could have an inflationary effect and start to dilute the value of the dollar in addition to causing upward pressure on interest rates potentially increasing what have been very low borrowing costs for the past several years. Now, these possible side effects could be markedly disrupting to economic growth, but it’s interesting to note since the 2009 recession, the monetary supply has shot up significantly through the Fed’s QE practices (quantitative easing – i.e. – a classy term that refers to the Fed printing money to finance the purchase of gov’t securities from banks) and we never saw a substantial jump in inflation or correspondingly in interest rates. As we witness the aftermath of the latest economic setback, we may see these potential effects become more in focus, but I still believe it’s typically not that train you see coming down the tracks that hits you. Stay focused on what you can actually control and be disciplined to live your best financial life. And don’t forget to appreciate what you have this Independence Day. God bless America!
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