Buffet on Dept

In: Business and Management

Submitted By lcja42
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nvestment guru Warren Buffett isn't sweating the debt ceiling as much as he is some of the country's other issues.

Buffett this weekend said the $16.4 trillion in debt the country has collected is not the number on which everyone should be focused.

"It is not a good thing to have it going up in relation to GDP, that should be stabilized, but the debt itself is not a problem," the CEO of Berkshire Hathaway (NYSE: BRK.A) told CBS' "Sunday Morning" this weekend.

Buffett said the country's debt is a "lower percentage of GDP than it was when we came out of World War II. You've got to think about in relation to GDP."

Here's why debt-to-GDP is what Buffett watches.
Private Briefing
Why Debt to GDP Matters

The debt-to-GDP ratio is a measure of the country's federal debt in relation to its gross domestic product. By comparing what the country owes to what it produces, the ratio indicates the country's ability to pay its debt; the higher the ratio, the higher the risk of default.

The ratio matters because:

Rating agencies, such as Fitch, S&P and Moody's, commonly use debt-to-GDP ratios to determine the credit worthiness of a country. Purchasers of a country's debt buy with the assertion they will be paid back on time. In a thriving economy, an elevated debt-to-GDP ratio isn't much of a concern since future earnings portend a country will be able to pay off its debts quickly. In a stagnant economy, a high ratio raises a red flag. Not having a feasible plan in place to address a high debt-to-GDP ratio increases the risk of default, which leads to credit downgrades, reduced debt sales and a tarnished reputation.

Since the United States technically hit the debt ceiling on Dec. 31, it is running on emergency funds from the Treasury Dept. until the debt ceiling is raised. Meanwhile, the debt-to-GDP ratio is climbing.

Currently the…...

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