For those that read Warren Buffett’s Annual Letter to Shareholders, some may have noticed an interesting section in the letter. 

“Paper money can see its value evaporate if fiscal folly prevails. In some countries, this reckless practice has become habitual, and, in our country’s short history, the U.S. has come close to the edge. Fixed-coupon bonds provide no protection against runaway currency. 

…

True, our country in its infancy sometimes borrowed abroad to supplement our own savings. But, concurrently, we needed many Americans to consistently save and then needed those savers or other Americans to wisely deploy the capital thus made available. If America had consumed all that it produced, the country would have been spinning its wheels. 

…

So thank you, Uncle Sam. Someday your nieces and nephews at Berkshire hope to send you even larger payments than we did in 2024. Spend it wisely. Take care of the many who, for no fault of their own, get the short straws in life. They deserve better. And never forget that we need you to maintain a stable currency and that result requires both wisdom and vigilance on your part.”

For someone who has been quoted as saying he does not pay much attention to what economists say, Buffett sure has a lot to say about the current economic backdrop America finds itself in. 

An argument can be made that Buffett believes the largest existential risk to the American Economy is the National Debt and by extension the United States Dollar’s status as the reserve currency. 

Currently, the United States National Debt sits at roughly $35 trillion or 123% of 2024 U.S. GDP. With the U.S government running a deficit of roughly $2 trillion in FY 2024, the chance of paying down the principle of the debt is looking bleak. Even with the new administration attempting to cut costs at the federal level, the increased interest rates on new debt make it tough to pay down as interest payments eat up a larger and larger share of government revenue. 

Therefore, the U.S. government could be left with only two options: default or inflate away the debt. The latter scenario is what Buffett seems to fear. Inflation would not only devalue Buffett’s $300 billion cash pile, it may also be the last straw for countries that already are looking for an alternative to the Dollar on the world stage. 

Trump has made it abundantly clear that he wants the United States to onshore production. This is difficult with the dollar’s relative strength. Weakening the dollar would serve a dual purpose for the Trump administration as it would lower the real value of the national debt while increasing United States’ export competitiveness abroad. However this devaluation would not be without cost. 

Since the Bretton Woods Agreement in 1944, the United States has enjoyed the status of the world reserve currency and all of its perks. The reserve status has allowed the United States large amounts of foreign investment as countries buy and sell treasuries to conduct global trade. The large foreign investment has allowed the United States to run huge deficits and spend without regard. The increased demand for the dollar has also helped keep the Dollar strong allowing cheap imports for American Consumers. These perks have allowed the U.S. Government to boost GDP through government spending and increased consumerism. 

Signs of rebuke for the Greenback have already been seen. Countries have ramped up their de-dollarization in recent years, especially after the United States froze Russian assets in response to the war in Ukraine. Since then, the petrodollar deal has lapsed, gold has rallied over 40% in large part due to increased demand from Foreign Central Banks, and BRICs has reaffirmed their intention to move away from the dollar in global trade. 

Issues such as currency devaluation and unmanageable debt are not created or solved overnight. However, Buffett seems to fear that if action is not taken to change course, there may be no recovery. Buffett seems to imply the need to increase corporate taxes and spend frugally rather than drunkenly. It remains to be seen if the debt crisis can be averted. In the meantime, there may be some short term pain as the long term future is secured.

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