Warren Buffett needs to retire and enjoy his old age as a billionaire. His reaction to the S&P downgrading is that it was stupid – that if it were up to him, he would create a AAAA rating for the U.S.
Buffett made his money primarily in the insurance business. His view is that the US Government doesn’t have any “debt” that isn’t in dollars, and the Fed/Treasury can always just print more dollars to pay the existing debt, so there is no chance the US can’t pay its interest.
The dollar itself is a debt. It’s a promise that at some point in the future, you can give someone your dollar and they will give you something of equal value in return.
There is more to the world’s economy than insurance products and derivative index products. We have this thing called the Current Account – which is the net amount of dollars that are flowing into and out of the United States for a variety of reasons. As the Federal Reserve prints more and more money, foreigners have to decide if they want to accept dollars in payment. The more dollars there are and the more people believe the US dollar will lose value (inflation), the less they want dollars and/or will convert them into something whose value isn’t dependent on the value of dollars. (ie Gold)
The last time the United States had a surplus was in 1981, which just so happens to be when Ronald Reagan became President:
We’re running around a 1/2 $trillion deficit in our trade. Foreigners aae not buying our US Treasury instruments – they know they have no long term future. They may have no default risk, but they have a huge foreign exchange risk. They know the Federal Reserve is keeping the interest rates artificially low, and at some point when they stop, anyone holding US Notes and Bonds will be socked big time – since interest rates and bond prices move in opposite directions.
The dollars we are shipping abroad are turning around and buying up our country. There is a pretty good chance the supermarket you shop at is owned by a European company. There is a good chance the gasoline station you buy gas at is owned by another country. The toll road you drive on is probably has been sold to another country. The parking meters in your downtown are probably owned by another country. The radio and TV stations you watch are probably owned by investors in another country. The music you listen to is owned by companies in another country. Your bank may be a branch of a bank from another country. The big chain restautant you eat at is probably owned by a Private Equity fund using money it borrowed from another country.
Money from China is paying Americans to strip copper out of buildings to ship it to China to build new cities. The main export from America is tearing down our buildings and factories and putting the scrap metal on boats to Asia. Our economy is being devoured from the inside out.
The final end game is when China, OPEC and Europe say “Enough is Enough” and no longer accept or price crude oil in US Dollars. The spread between West Texas and Brent Crude is over $20 a barrel – that’s partly the situation in Libya and partly the nature of the two types of oil, but to a large degree it is pointing to the Europeans not wanting to sell their oil for dollars.
Should the monarchy in Saudi Arabia propped up for decades by the United States suddenly be overthrown (we do believe in Democracy right?), the game is over.