Watch stocks you care about
The single, easiest way to keep track of all the stocks that matter...
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
In a recent Fortune interview, Warren Buffett likened a U.S. debt default to a "nuclear bomb." Charlie Munger took it one step further, saying, "I think Warren has understated how awful it is" for a default to happen.
Why the strong words? Well, because the government shutdown is just a sideshow compared with the looming debt-ceiling crisis. While the shutdown is hurting the economy to the tune of 0.1 to 0.15 percentage points of GDP growth per week, even a temporary default on the country's debt could send the U.S. and world economies into a recession.
"It makes absolutely no sense for [the debt ceiling] to be used as a lever for other things," Buffett said in the interview. "It should be like nuclear bombs, basically too horrible to use."
"It's deeply immoral to do this," Munger added. "The promise of the U.S. to pay, in dollars of our own printing, is absolute, and to default on that is just crazy, and it ought to be unthinkable on both sides of the political aisle."
Default not possible?
Investors don't seem to be taking the threat of a default seriously enough. Since Oct. 1, the Dow Jones Industrial Average (DJINDICES: ^DJI ) is down just less than 3%. But it's not just Buffett and his longtime business partner who believe a default would be calamitous. The U.S. Chamber of Commerce, International Monetary Fund Managing Director Christine Lagarde, Goldman Sachs CEO Lloyd Blankfein, Bank of America CEO Brian Moynihan, PIMCO CEO Bill Gross, and numerous other business leaders have gone on record to say how disastrous a default would be.
That's why it's worrisome when some of the lawmakers who control the fate of the debt ceiling don't think a default is possible.
"I would dispel the rumor that is going around that you hear on every newscast that if we don't raise the debt ceiling, we will default on our debt," said Sen. Tom Coburn (R-Okla.), Monday on CBS This Morning. "We won't. We'll continue to pay our interest."
"We have more than enough cash flow to pay interest on the public debt, so there is no way we're going to default on the public debt unless the president of the United States intentionally does so," said Rep. Joe Barton (R.-Texas).
And The Wall Street Journal quoted Sen. Ron Johnson (R-Wis.) as saying, "The Treasury secretary should be calming the markets, saying, 'Guys, we have more than enough tax revenue coming in; there's no reason for the U.S. to default on its debt at all."
Why are they saying this? For one thing, Republicans are passing around a memo from Moody's that says, in part:
We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact. The debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit (actually the exhaustion of the Treasury's extraordinary measures to raise funds) and a default.
This is the same Moody's, mind you, that Congress blamed for the financial crisis because of the ratings agency's inflated ratings on mortgage-backed securities ratings. Moody's currently has a Aaa rating on U.S. Treasuries with a stable outlook, while Fitch has a AAA rating with a negative outlook, and S&P gives U.S. treasuries a AA+ rating. Let's hope Moody's isn't wrong again.
The next step
While Treasury Secretary Jack Lew says the debt ceiling needs to be raised by Oct. 17, the Treasury Department will still have some cash on hand to pay the country's obligations until the end of the month. The worrisome part would come in November, when it's unclear whether the Treasury would be able to pay its bills, especially its $60 billion-plus due on Nov. 1 and another $40 billion-plus on Nov. 15.
What can you do?
"If people really understand the problem, and it's big enough, people will do the right thing," Buffett said in the Fortune interview.
I agree with him. I believe Congress will raise the debt ceiling before the country defaults, but probably not until the last minute.
But I also agree that people really need to understand what's happening here. In both the public and private sectors, governance functions best when stakeholders educate themselves, take an active interest in what's going on, and hold their representatives accountable. It might just be the only way to ensure we fix this mess before it's too late.
Want to understand the debt problem?
The Motley Fool's free report "Everything You Need to Know About the National Debt" offers step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!