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to develop whatever skills are needed to make yourself the most effective human being. But beyond that, the best investment is a good business, one that has a durable competitive advantage and that will be around 10 or 20 or 50 or 100 years from now, turning out something people want at a profi t. The U.S. government bond is absolutely certain to be paid. It ’ s just total nonsense when people talk about the U. S. going bankrupt. I mean, the U.S. government will always pay its debts. The purchasing power of the dollar you receive is likely to be less than the dollar that you invested, so you have a purchasing power risk. But you don ’ t have a payment risk with U.S. government bonds. So we would rather own a good business

[with U.S. government bonds] which is likely to fl ourish almost under any circumstances and where, if there ’ s a lot of infl ation, we ’ ll earn just as much in terms of real dollars as we would today.

But you should not be afraid of government bonds in terms of being paid.

Q: Would you see a problem if somewhere like China, for instance, stopped putting so much money back into the bonds?

Warren Buffett: People get very confused about what will happen if, say, the Chinese or other countries dump their government bonds. If we buy $ 2 billion more of goods today than we sell to the rest of the world, which is more or less what happens, the rest of the world gets $ 2 billion worth of something, don ’ t they? They get these little claim checks called U.S. dollars. They can exchange those U.S. dollars for U.S. government bonds, they can buy stocks here, they can buy real estate here, but they have to buy something.

So let ’ s say the Chinese have $ 1 trillion worth of U.S. government bonds. Let ’ s say they decided to sell them. If they sell them in the United States, they get dollars. What do they do with the dollars?

They have to buy some other asset in the United States. They can trade those government bonds for stocks, but that just creates more demand for stocks and less for bonds. But that ’ s happening every day for other reasons.

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188 The

Interviews

Now, they also could sell that trillion dollars to the French and get euros in exchange, but now the French would own them. If they dumped foreign assets on the United States, they get other United States assets. Countries can trade them around among themselves. If the British prefer to have dollars and the Chinese prefer to have pounds, you will fi nd them making an exchange.

But the Chinese — or any other country — can ’ t dump their U.S.

government bonds and have some terrible depressing effect on the United States because in exchange they ’ ll get dollars, and what do they do with the dollars? They put them in banks or something of the sort. They buy stocks with them. They buy real estate.

So it ’ s exactly like saying, “ If I ’ ve got a billion dollars worth of government bonds and I want to sell them, well, I ’ ll get a billion dollars worth of cash and I ’ ve got to buy something else. ” And that something else may be my government bonds.

But the most important question in economics is, “ And then what? ” After all, you can ’ t do just one thing in economics.

Anything you do triggers another corresponding action. So if somebody says to you, “ The Chinese are going to sell a trillion dollars worth of government bonds, ” then just say, “ And then what? What do they get? ” They get a trillion dollars worth of cash if they sell them in the United States. They put the cash in bonds here, or they put them into other bonds. They put them in stocks, real estate, or something of the sort.

What does happen, of course, is if they pile up more and more assets abroad, we have to pay them interest on that. We have a servicing cost, and that ’ s where 2 or 3 percent of the GDP of the country could go 10 or 20 years from now, and I think that can be politically very unstable.

Q: How so?

Warren Buffett: If the American worker were told by a politician 20 years from now that, when he works 40 hours, an hour and a half