Buffett says S&P debt downgrade a mistake but wasn’t it inevitable?
Posted on 07 August 2011 with 7 comments from readers
It is amazing to listen to the reaction to the S&P downgrade of US debt from triple-A for the first time in history and to get the impression that S&P is somehow responsible for the economic mess that got us to this point.
Get real Warren Buffett and others who have laid into S&P since Friday. This is only a credit ratings agency doing its sums. And if they did not do the downgrade now realistically how long would it be?
IOUSA film
At the Agora Financial conference last month in Vancover Agora chief Addison Wiggin recalled how Warren Buffett had completely floored the launch of his film IOUSA on CNBC TV with a dismissive comment that the USA would grow its way out of debt. The profile of the film got cancelled. The debt problem just got worse and as for the growth?
Well, it just has not been enough. Mr Wiggin is proven right. Mr Buffett is on the wrong side of this trade. The Agora film IOUSA set out the problem in very clear and explicit terms and was ignored.
The S&P downgrade is the result. If the US authorities had gotten their act together in time there would not be the downgrade. Let us not forget, S&P is making a mathematical calculation about the US debt not playing pollitics.
There comes a point in government debt when it becomes too high. In simple terms that means you have to start borrowing to pay your interest, and the debt just gets bigger and bigger, it balloons.
Default coming
A government then has either to default on its bonds or print a massive amount of money to cover their nominal value. Anybody who watched IOUSA, and fewer did after Buffett’s outburst, will know where the US stands.
S&P has a duty to warn of the situation and adjust its credit ratings to reflect this lack of creditworthiness. That it failed to do so on subprime mortgages is true but obviously makes it important to S&P to get it right this time.
Warren Buffet did nobody any favors by lambasting the debt problem last time and he is wrong to do so again now.
7 Comments posted by readers:
The S&P downgrade of US debt is correct and inevitable…but let’s not start applauding these “geniuses”. Moody’s, Standard and Poor & Fitch were paid by investment banks to rate their securities when the getting was good and are just as responsible for the current financial crisis as the banks and government meddlers!
These rating agencies have become a joke….always way behind the game. Just like a teacher who accepts funds to grade a student’s papers, they should be hung out to dry!
Well done, Ed! Excellent critique! To criticise Buffet is one thing. but to illustrate your criticism by way of the film IOUSA and how Buffet mucked it up is another thing, and greatly strengthens your justified questioning of this man-made god of human finances.
I also agree with your support of S&P in this matter. It is not logical to dismiss this decision of theirs to downgrade to AA+ because they failed in the past. It is perfectly reasonable to applaud them now, like a teacher would a pupil that has learned from past mistakes and is now turning in AAA work.
If S&P showed cowardice in the past, if they were bribed by bankers (as has just been suggested above), and they have gotten over their fear of Buffet-like brickbats and have stepped aside from financial influences, then can we not applaud a sinner who repenteth? Of course we can!
Indeed, by this totally sensible decision, as you have said, they are restoring their credibility in this amoral jungle of animal bites animal.
We all know that S&P are right! Indeed, it is because they failed to do just this in the past that we are exhorted not to applaud them in the present.
Hey ho!
well spoken Paul..end of story..only real interest here is silver vs. silver, metal or commodity..there are “laws”, & w/ our govts we need to keep that in quotes, which require certain institutionals to exit downed intruments, & folk required to sell US treasuries aint gonna be good for interest rates in a very few tomorrows..
naysayers still have the floor in the West, & denial of bad tidings still the norm, but we passed another milestone friday, & one can NEVER go home
Readers may want to read Will Hutton’s article, ‘Our Financial System Has Become a Madhouse. We need Radical Change’ at http://www.guardian.co.uk on Saturday August 6, in which he lays out the ONLY choice to avoid catastrophe now – money printing. ( Hey, I wrote it first! )
Alan Greenspan JUST said, ” The United States will NEVER default on its’ debt because the United States can print money.”
As far as the opinion of Warren Buffet, you have to remember that Buffet grew up, and made his vast fortune, during the period when the USA was at its’ height of power and global economic dominance. ALL industrial competitors had been reduced to ashes by saturation bombing during World War II. Everything had to be rebuilt, and the USA mainland was untouched due to geography. (As it will be for a LONG time, unless the world is destroyed in a nuclear war, which I don’t expect for a long time, if ever. How rich you are won’t matter if the USA & Russia ever start turning launch keys, because it will spread nearly everywhere in minutes during the confusion and panic.) So Buffet’s judgement is somewhat warped by America’s post-war industrial monopoly success.
However, the USA is far from finished. It has most of the best universities in the world. If the government would encourage it with some grants, thousands of very bright people would flock, not to China or Brazil, or Europe, but to the USA. And most would stay.The climate in coastal California is unmatched in the free, democratic, safe, world. All the VERY rich entertainers and athletes have huge homes there for a reason. The USA can grow ALL the food it needs. It is one of the world’s largest food exporters. It has the largest deposits of coal. It has vast amounts of natural gas. Canada has large reserves of oil that can be delivered by pipelines, not vulnerable tankers that any sub or warplane can sink. Colorado and Utah contain the largest deposits of hydrocarbons yet found on earth, in oil shale. The USA has a growing population with room for hundreds of millions more. The USA has to build walls to keep young people OUT. And, like the majority of the population already here, the ones that get in are Christians that can assimilate, not isolate themselves and become a potentially violent threat, like is happening in Europe today. It has an economy over twice as large as China, despite having only 1/4 the population. As some big Communist Party dictatorship official said, “We can draw the best minds from a billion people. The Americans can draw from the other 5 billion.” Poor people in the USA have cable TV, air conditioning, and cell phones.
Was the ipod invented in China or Europe? The PC? Whose movies does the world watch and pirate? Germany, China, the UK, or Hollywood? Whose ugly fashions do teens nearly everywhere copy? Where did rap (yuck) music(?) come from?
The problem with America is the selfish politicians running it. They are owned by the new class of super rich that have emerged since Reagan began lowering income and inheritance taxes, which is the main reason we are now broke. Watch ‘Inside Job’.
But don’t write off the USA, just yet. And rest assured, if it does go down, it will probably take your lifestyle with it, especially if you live in the Middle East. Better learn to speak Farsi over there. And get ready to pray 5 times a day without no alcohol. Buy a burka for your wife. Tell the Indonesians and Filipinos goodbye. You will be doing their jobs, if the US Navy disappears.
Billionaire Wilbur Ross is on CNBC saying that, if interest rates in the US would spiral out of control, Ben Bernanke will introduce QE III, but he doesn’t expect interest rates to do that. He just bought a chunk of the biggest Irish bank from the Irish Government for pennies on the dollar.
He agrees that the government of the USA has become dysfunctional. (No amount of hard work can overcome that!) Ross says commodities demand will become greater and greater, and that large companies are buying the companies that provide the natural resources that they need. Steel companies buying mining companies with large coal holdings, etc.
The ECB just announced a program to buy Spanish and Italian bonds.
Greenspan just said himself that the reaction would be negative. See link below.
http://www.realclearpolitics.com/video/2011/08/07/greenspan_us_can_pay_any_debt_it_has_because_we_can_always_print_money.html
Bill in the tropics….That was poetry! I have a favourite question I ask dinner guests over here in the sand. “What country would you spend the rest of your life in if you could never cross a border again?” When I add “It’s simple….the US.” – people react like your an alien just arrived from another planet! Put me and my family on a nice golf course community in Palm Springs….and no better can it get!
Warren Buffet has just said, “I wouldn’t dream of putting Berkshire Hathaway money anywhere else (than US Treasuries). If I have to buy US Treasuries at zero per cent yield, I will. I don’t like it, but we’ll do it.”
Why does he reason like this? Is he, in fact, saying that he won’t, actually, buy US Treasuries but for publicity’s sake, he says he will if he has to?
But why buy US Treasuries at 0% yield, especially when he doesn’t like doing it, when he can buy gold and silver? What is the matter with Buffet and Soros regarding gold and silver investment? Is share/bond investment a line of thinking which is incompatible with bullion investment?
The Editor has given us a couple of videos from GoldMoney where silver and gold gurus are interviewed. Perhaps they are unable to think in terms of share/bond investment for the same reason, namely, that bullion investment thinking is incompatible with share/bond investment thinking?
Perhaps you have to be one or the other because one implies distrust of the other and also because the type of due diligence that is required is so different between the two forms of investment.