- Tom Silva
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Warren Buffet Bullish on U.S. Credit Rating
Standard & Poor’s may have downgraded the United States credit rating from AAA to AA+ and the bears may have taken over Wall Street, but the Berkshire Hathaway chairman and billionaire Warren Buffett believes that the nation deserves a AAAA rating.
In a recent appearance on CNBC, Buffett said that he still believes that the United States’ debt is AAA and that he’s not changing his mind about Treasuries based on Standard & Poor’s downgrade. “If anything, it may change my opinion on S&P,” according to the Oracle of Omaha. “I wouldn’t dream of putting it anywhere else,” Buffett said, noting that at Berkshire, the only reason he’s sold Treasuries in the past is to purchase stocks or make acquisitions. Berkshire is still buying T-bills, even though yields have declined. “If I have to buy (Treasuries) at a zero percent yield, I will,” he said. “I don’t like it, but we’ll do it.”
Buffett has something of a vested interest in criticizing Standard & Poor’s. Berkshire Hathaway is one of the biggest shareholders in Standard & Poor’s main competitor Moody’s with about 28 million shares. But the billionaire has long urged people to make their own decisions about an investment’s prospects without relying on credit rating agencies. Buffett said the action doesn’t change his view on the soundness of U.S. Treasury bills. At least $40 billion of Berkshire Hathaway’s approximately $48 billion cash and equivalents is in U.S. Treasury bills, and Buffett won’t consider investing it elsewhere.
According to Buffett, America’s leaders may have a difficult time agreeing on the country’s financial future and the value of the dollar may slide, but that won’t keep the world’s richest nation from paying its debts. The United States has a GDP of about $48,000 per person, and the Federal Reserve can always print more money. “Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA,” Buffett said.
Writing on the InvestorPlace.com website, Jeff Reeves says that “Before you scoff that Buffett is just a bygone relic of an era during which stocks like General Electric truly did have bulletproof dividends and it would have been unfathomable for stocks like General Motors to go bankrupt, consider this: In September 2008, the depths of the financial crisis when nobody knew which bank would fail next, Buffett and Berkshire dumped $5 billion into preferred stock of Goldman Sachs. Thanks to the 10 percent interest on those shares, Berkshire Hathaway earned a cool $500 million per year in dividends before Goldman bought back the stock several months ago. What’s more, the investment bank paid a hefty 10 percent premium to buy back those preferred shares. Maybe it was crazy to jump into banks headfirst when the market was going haywire in 2008. But it was awfully profitable for Buffett. You might think it’s crazy to stick to your buy-and-hold strategy now, or to continue to rely on U.S. Treasury Bonds. But take a deep breath and remember that not everyone is screaming and running for the hills. Yes, persistent problems with unemployment, the political bickering in Congress and the flatlining of our American economy are serious issues. But they are hardly new.”
Not everyone agrees with Buffett. According to the Equity Master website, “We must say that we do not agree with Mr. Buffett. We are not arguing with the credibility of S&P, whose reputation admittedly became tainted when it gave the highest rating to many mortgaged backed securities in the months leading up to the demise of Lehman. But that does not mean that the U.S. is without some serious problems. Indeed, the U.S.’ mounting debt is a huge cause for concern and the government’s latest move to raise the debt ceiling is only likely to postpone an eventual default and not entirely extinguish it. Moreover, the claim that the U.S. can pay its debt because it can print more money is a dangerous one to make. Printing money never really solved America’s problems. The two big quantitative easing programs and their failure to revive the sagging U.S. economy is testimonial to the fact. One thing that it will certainly do is bring down the value of the dollar and cause inflation to accelerate posing a fresh set of problems for the U.S. So, while criticisms can be piled on S&P, downgrading of the U.S.’ credit rating is something that the world’s largest economy had a long time coming.”
Firstpost agrees that Buffett is wrong. “Among other things, he said that the U.S. deserved a AAA credit rating when the S&P decided to bring it down to AA+. He also believes the U.S. will avert a double-dip recession. Well, Mr. Buffett, you are already half-wrong. A slow-growing nation with a 100 percent debt-to-GDP ratio cannot be AAA by any stretch of economic logic. It makes India’s 70-72 percent debt-GDP ratio look like the epitome of prudence. As for the other half of your prediction – that the U.S. will avoid a double-dip recession – the jury is out on that one, but the recession wasn’t the reason for the S&P downgrade anyway. There are two reasons, or maybe three, why the U.S. is in a mess. One is that it is overleveraged – in deep debt – both at the level of government and the common people. Two, the law that the U.S. can indefinitely live beyond its means has a flaw. It was built on the assumption that dollar debts can be paid off by printing more of the green stuff forever.”