Warren Buffett Says Default on U.S. Debt Like a "Nuclear Bomb"

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!


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2013, at 5:48 PM, TheDumbMoney wrote:

    What the conservative ideologues are missing, among many other things, is that a default on social security payments would be considered just as much a "default" as a default on bond payments. Also, the government can't pay both social security and bond debt. So the President should ask these people to hold a vote on which of those two they would prefer that he pay should we actually hit the final debt ceiling.

  • Report this Comment On October 09, 2013, at 6:45 PM, emferguson wrote:

    You'd think members of Congress wold be smart enough to realize the federal government has a bunch of automated systems. It isn't just Jack Lew sitting down and writing checks. They have no way to know the debt would be serviced. Moody's, well, they're Moody's. Of course they have no idea what they're talking about. This is an incredibly stupid experiment to run. Republicans are too irresponsible to be allowed anywhere around government.

  • Report this Comment On October 10, 2013, at 12:21 AM, sellous wrote:

    Mr. Buffett,

    In doing mathematics we are told that nothing from nothing leaves nothing!

    They can default for another one hundred years, it does not matter to me a poor peasant one bit as I have nothing to gain or lose.

    You with your Billions have something to lose as a result it will be as you describe it, while it means a sounder sleep at nights for me.

  • Report this Comment On October 10, 2013, at 9:38 AM, JePonce wrote:

    That is exactly Obama is threatening to use it.

    Obama and his Leftists in Congress created the rhetorical illusion that unless Republicans surrender by funding his Cloward-Piven Obamacare, raise the debt ceiling so he can drive up the National Taxpayer further, Senior Citizens might not get their checks, disabled/wounded veterans might not receive their benefits, and he might default on our debt payment.

    More Leftist fear mongering! Watch out Chicken Little, the sky is falling!”

    Obama collects $226.0 billion in tax revenue each month.

    Obama pays out $68.0 billion to social security recipients, $42.0 billion to Medicare recipients, $18.0 billion on the interest on our debt, and $6.0 billion on veteran’s benefits.

    That leaves him a balance of $92.0 billion to spend on less important expenses like funding Hamas in Palestine, the Muslim Brotherhood in Egypt, and the Syrian rebels that are aligned with Al Qaeda.

    Default is not required. Default is Obama’s choice.

    Plato said, “Rhetoric is the ART of RULING the Minds of men.”

    The American Left have proven that rhetoric works exceedingly well on the uninformed and the cognitively challenged.

  • Report this Comment On October 10, 2013, at 11:01 AM, TXObjectivist75 wrote:

    Given the administration's pettiness in regards to parks, military death benefits, etc, it wouldn't surprise me at all if they purposely defaulted after Oct 17. All this talk seems to be preparing the way for them to do exactly that. "See? I told you we'd default if those Republicans didn't give in!"

  • Report this Comment On October 10, 2013, at 11:10 AM, Mega wrote:

    JePonce, TXObjectivist75

    However the Administration chooses to address the discrepancy between spending authorized by Congress and borrowing authorized by Congress, you are sure to complain bitterly.

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