There’s growing concern about a looming debt crisis in America. High-profile financial figures such as Bridgewater’s Ray Dalio and JP Morgan’s CEO Jamie Dimon have shared their concerns about the record U.S. national debt in recent months.
However, legendary investor Warren Buffett proposed a solution to the nation’s borrowing issue more than a decade ago.
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“I could end the deficit in five minutes,” he told CNBC’s Becky Quick in a 2011 interview. “You just pass a law that says that any time there’s a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.”
The Oracle of Omaha believes this simple solution could solve one of America’s more stubborn issues.
Incentives dictate actions?
Buffett’s longtime business partner the late-Charlie Munger once said, “Show me the incentive, and I will show you the outcome.” It’s a philosophy that guides the business decisions and compensation plans across Berkshire Hathaway.
This is probably why Buffett believes a deterrent for the American government and lawmakers could shift the way they spend tax dollars. If lawmakers see their re-elections at risk, they may be more careful about government deficit spending.
This isn’t an unusual idea. Germany has a hard cap on deficit spending which has compelled successive governments to reign in spending over the years.
However, there is no hard cap on America’s deficit. As of May, the federal government has spent $1.2 trillion more than it has collected in fiscal year 2024. In the first quarter of 2024, federal debt as a percent of GDP was 97.3%.
This large debt burden and the lack of spending restraint is causing some economists and investors to worry about a potential debt crisis.
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How can ordinary investors protect their wealth if the government is left with no choice but to keep printing more money to pay off the debt and drives inflation and interest rates higher? Wharton Professor Kent Smetters spoke to Business Insider about assets that can be used to hedge against a possible economic downturn in such a scenario. His advice is buying assets that the government would be last in line to default on.
Treasury Inflation-Protected Securities (TIPS)
U.S. treasury bonds are generally considered a low-risk investment because lending money to the U.S. government has been a reliable bet for centuries. However, bond investors are still subject to wealth erosion through inflation — which could spike in a debt crisis. Professor Smetters recommends Treasury Inflation-Protected Securities that offer the safe and stable return of a bond with downside protection.
Series I Savings Bonds
Just like TIPS, I Bonds provide protection from inflation. However, the interest rate on these bonds is adjusted every six months and is based on a fixed rate and an inflation rate. “An additional benefit is you can choose to defer federal taxes until you redeem the bond or it reaches maturity,” Andrew Latham, a certified financial planner, told US News. “This flexibility can be beneficial for tax planning, especially if you expect to be in a lower tax bracket in the future. Note that if you use I bonds for educational purposes, you may be eligible for tax exemption on the interest earned.”
Overseas investments
Investors can also diversify by looking beyond their borders to countries that are balancing their budgets well and have lower debt-to-GDP ratios.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
