What Gurus Are Saying About the Debt Ceiling Crisis

The U.S. Treasury has told congress that they must come to an agreement on raising the debt ceiling by August 2 in order to prevent government debt defaults, a downgrade of the nation's AAA rating, a declining dollar and increased interest rates. With the deadline less than a week away, both parties in congress are still in a deadlock. The situation, which could have major implications for the stock market and economy, has spurred many of the world’s leading money managers to voice their views on whether the debt ceiling should be raised. Some have written letters or given interviews criticizing government leaders, proposing solutions, and arguing for who or what they believe is to blame. Many of them disagree. Here’s a collection of what Gurus are saying:


Bruce Berkowitz


Audience Member 4: I’d like to ask you what do you think about the vote recently in Congress about the debt limit and what would really, truly happen to America if they didn’t borrow anymore?

Bruce Berkowitz: It’s insane. We’ve got to increase the debt limit and that’s it. We’re the reserve currency of the world. We’re going to start paying our debts to the Chinese. We’re going to default? It’s insane. I don’t even know how you can even begin to go there.


AAII Presentation June 1


George Soros


In Europe the euro is a real crisis. It is a crisis of the European Union, not only of the euro, whereas this budget dispute in the United States is mainly theater. It’s going to be solved. I’m not worried about it.


BBC Radio interview July 19


Jim Rogers


We’re going to default one way or another. They’re not going to call it a default, but you can inflate your currency and pay people back in worthless money so it can happen. And these debt reduction talks are a sham as far as I’m concerned. We’ve been talking about this for 30, 40, 50 years. Twenty five years ago there was the Grace Commission which said we’ve got to stop it. Then we passed the Graham Rudman act and said we cannot have deficit spending anymore. Ha. They just ignore everything and continue on their merry ways, and they will again.


…


Probably raise the debt ceiling and announce some kind of wonderful deal which they will then promptly ignore, just as they did the Graham Rudman law. The United States is not going to close down. It might be good for the world if the United States government closed down for a while, but I cannot see that happening. Something will happen, things will look better, but then in six months or a year will be worse again.”


Fox Business Interview July 12


Warren Buffett


I encouraged them to keep shooting for something very big, the American people want something big, [President Obama] wants something big, and I certainly hope we get it out in the next week or two.


The real question is whether we have the foresight to do it today or we keep waiting and waiting and waiting. The problem is with us and the president believes in addressing a problem like that, and addressing it in a big way. The American people believe in it, my friends back in Nebraska believe in that, so I hope it gets done.


I don’t think we need political cover now, I think we need a real deficit reduction plan. And I think it’s an opportunity to do that, I think the president has said he’s willing to talk about things, in terms of what he would like to see in this world, and he expects the other side to do the same thing and I think any plan that simply says ‘we’re going to think about this later, essentially, and we’re going to try to figure out how if things go wrong with unemployment on the other party’ is a terrible mistake.


We cannot go to August 2 and tell the rest of the world that because we’re having this little fight in our sandbox back here that we’re going to essentially default on obligations of the United States for the first time in our history. That’s a level of immaturity that I don’t believe this congress is up to. So it’ll happen. We’ll get something and in the end we have to get something, but why not aim high rather than aim low?


…


Here’s a debt limit. We’ve changed it almost 100 times over the years. We changed it I think seven times in the Bush administration. All it does it slow down a process and divert people’s energy and causes people to posture. It doesn’t really make any sense. The way to limit debt is by taking in revenues that are appropriate in relation to your expenditures, and to have this artificial limit which always gets raise in the end, disrupt the activities in an important way of congress periodically is a waste of congress’ time.


…


Nobody knows exactly what would happen. If people thought that ten minutes later it would get solved it wouldn’t be calamitous, but you’re running a risk that’s absolutely silly to run. Why stick a gun to your head and say well there’s only a bullet in one of the six chambers so I’ll spin it and pull it and probably it won’t happen? You’re running a totally unnecessary risk and you’re sending a signal to the rest of the world that we can’t think ahead in this country.


NBC Interview July 18


Daniel Loeb


The budget is not the only thing in deficit today, as a paucity of leadership has left the country without a stable framework in which businesses can conduct business, investors can invest, and consumers can consume without a high degree of uncertainty and fear. Politically charged statements and brinkmanship have served to deepen divisiveness between the parties and led to confusion and fear among citizens. There has been much said about who is allegedly the "adult in the room," but President Obama has yet to speak to Americans as adults, insisting instead on his preferred technique – stirring up class warfare. Scaring senior citizens about the possibility of not receiving their Social Security and Medicare checks, lambasting the corporate jet industry, and calling for higher taxes on managers of private partnerships is not a constructive approach to handling a complex multi”trillion dollar problem that will have a multi”generational impact.


In remarks on the House floor this week, Representative Paul Ryan (R”WI) neatly characterized the perils of the present moment: "I keep hearing . . . .' The President's got a plan. The President's offering balance.' The President hasn't offered a thing yet. Nothing on paper. Nothing in public.


Third Point Second Quarter Investor Letter


David Einhorn


Here in the U.S., the rating agencies are making similar noises. S&P has indicated that if Congress doesn’t extend the debt ceiling, and the government defaults on so much as a single payment, the U.S. credit rating could drop straight from AAA to D. Earth to S&P: if you can foresee a near-term default scenario that is plausible enough for you to warn about it, AAA cannot be the correct current rating.


The authorities failed to ban credit default swaps and disarm the rating agencies through Dodd-Frank when they had the chance. Now the questions are whether the credit default swaps will cause another banking crisis, and what the governments will do about the loaded gun if the rating agencies pointed squarely at their heads.


The US Economy continued to soften during the quarter. Higher energy and food prices are crowding out consumer demand for other items, and the market consensus is that QE2 has proven to be counter-productive. Unable to concede this, Mr. Bernanke nonetheless seems determined to have it both ways, remarking in a recent speech that monetary policy cannot be a panacea. For the moment, the Fed seems boxed into a corner and in an effort to prevent soaring commodity prices from triggering another recession appears determined to wean itself from further money printing. We won’t know whether the Fed is serous until it withholds monetary easing in the face of a further softening of economic conditions or a falling stock market.


Greenlight Capital Second Quarter Investor Letter


Stanley Druckenmiller


"I think technical default would be horrible," he says from the 24th floor of his midtown Manhattan office, "but I don't think it's going to be the end of the world. It's not going to be catastrophic. What's going to be catastrophic is if we don't solve the real problem," meaning Washington's spending addiction.


“Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says. Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.” …”Russia had a real default and two or three years later they had all-time low interest rates,” says Mr. Druckenmiller. In the future, he says, “People aren’t going to wonder whether 20 years ago we delayed an interest payment for six days. They’re going to wonder whether we got our house in order.”


Wall Street Journal Interview May 14


Howard Marks


When deficit spending is unavoidable, we have to borrow.


· Since we’re at the current debt ceiling, continuing to borrow requires that the ceiling be raised.


· If the ceiling isn’t raised and we can’t borrow, we won’t be able to make good on all of our obligations. Someone will have to go unpaid: employees, creditors, soldiers, retirees, vendors, etc. I don’t think anyone believes we can make good on all of our obligations without borrowing.


· Thus we have to solve this immediate problem. We can enact spending cuts and/or tax increases, but invariably these things will only take effect over the long run.


· In the short run we have no choice but to raise the debt ceiling and keep borrowing.


…


The world has awakened to the undesirability of ever-growing government debt.


Repairing the situation will require difficult decisions and great sacrifices, especially on the part of lawmakers required to vote for unpopular solutions. This would be a great time to start taking positive steps.


Oaktree Capital Management Memo “Down to the Wire” July


John Hussman


Here in the U.S., total Federal debt to GDP is also approaching 100%, but the debt held by the public (outside of that held by Social Security and the Federal Reserve) amounts to about 60% of GDP and rising, due to recent budget deficits of about 10% of GDP annually. This is presently manageable since so much of that debt is of short-maturity and is being financed at very low interest rates. And though U.S. Federal tax revenues have historically run near 19% of GDP (they're presently only about 16% due to the sluggish economy), those depressed interest rates mean that debt service doesn't consume a huge chunk of revenues just yet.


Still, it's precisely that short average maturity that makes the debt problematic from a long-run perspective, because it can't be inflated away easily. In the event of sustained inflation, the debt would have to be constantly refinanced at higher and higher yields. Contrary to the assertion that the U.S. can easily inflate its debts away, it is clear that sustained inflation would create enormous risks to our long-run fiscal condition by driving interest costs to an intolerable share of revenues. At that point, any shortfall in GDP growth or government revenues would result in a rapid spike in debt-to-GDP (as Greece and other peripheral European nations are experiencing now). Prior to embarking on an inflationary course, the first thing a government would want to do is dramatically lengthen the maturity of its debts.


Weekly Market Commentary “Simple Arithmetic” July 25