CNBC CNBC's Becky Quick with Warren Buffett

This is a transcript of Warren Buffett's live interview with Becky Quick on CNBC's Squawk Box, Thursday, July 7, 2011.The transcript is also available here for download as a PDF.

CARL QUINTANILLA: We want to go live to Becky in Sun Valley, Idaho, who joins us this morning with a very special guest.  Becky, still dark there? Good morning to you. —

BECKY QUICK:  Good morning, Carl. Good morning, Joe. It's great to see you guys and we do have a very special guest who's joining us this morning. Warren Buffett, who's the chairman and CEO of Berkshire Hathaway has climbed up the mountain to join us this morning and talk a little bit about a lot of the issues that we've been discussing for weeks, if not months at this point. In fact, we were just listening in to what some of what Eric Cantor had to say.

And Warren, probably the best place to start this conversation is what's happening in Washington right now. These discussions over the debt ceiling seem to be front and center, not only for Washington, but for Wall Street as well. How big of an issue is this and how dangerous is it— how dangerous is it really if they don't raise the debt ceiling?

WARREN BUFFETT (Berkshire Hathaway Chairman & CEO): Well, we don't know exactly what'll happen. I mean, but if you gave me a six shooter and stuck a gun in— a bullet in one chamber and said spin it and five times out of six nothing bad's going to happen, but we haven't done this before, so we're not sure what's going to happen if the sixth one's pulled. It's just silly to do and we raised the debt ceiling seven times during the Bush administration and now in this administration, they're using it as a hostage and you really don't have any business by playing Russian roulette to get your way in some other matter. We should be more grown up than that.

BECKY: Although the argument is at this point we're at a very different level. We are facing some massive deficits. We've taken off on some spending in incredibly high amounts over the last couple of years. And if you can take a phrase from Rahm Emanuel, why put a crisis— why waste a good crisis if you can actually get something done that could be, in the longer term, good for the economy?

BUFFETT: Well, whether it would be good for the economy to have— to have policy...

BECKY: Or the nation, I should say.

BUFFETT: ...under conditions like this is another question. I mean, when you have somebody with a gun to your head, you know, do you really come out with the greatest— the most properly reasoned solution to something? And we had— we had— we had debt at 120 percent of GDP, far higher than this after World War II and no one went around threatening we're going to ruin the credit of the United States or something in order to get a better balance of debt to GDP. We just went about our business and people did it in a cooperative way, but they didn't do it by sticking guns at each other's heads.

BECKY: What do you think would happen if we get past this August 2nd deadline or a date when the Treasury really has run out of money? What happens?

BUFFETT: Yeah. And Becky, nobody knows.

BECKY: Yeah.

BUFFETT: I mean, the odds are very good that people would assume we get things straightened out within a few days and that nothing dramatic would happen. On the other hand, you're playing with fire when you don't need to play with fire. And we don't need to tell the rest of the world that any time people in Congress start throwing a tantrum that we're not going to pay our bills. But we're going to pay our bills in the end. Now you've got two ways of paying your bills. You can pay your bills on time and not make a big fuss of it, and you'll have the world regard you on way. And you can pay your bills only at the threat of a gun and the world is going to regard you differently. So it is not— it is not a great pattern to project to the rest of the world.

BECKY: Republicans have argued, a great number of them have argued, that even if we get to that point, the Treasury could decide which bills to pay and which not to pay, that they could go ahead and pay off those who own Treasuries, pay off the bond holders, and find cuts in the government to make sure that they're still, technically, not in default. Is that a proper solution?

BUFFETT: Well, if they don't get an increase in the authorization, they're going to have to spend $4 billion a day less than is coming in. Now who makes that decision as to what 4 billion doesn't get paid, but I will tell you when you don't spend $4 billion a day that you promised to pay, it'll be noticeable. And you'll have— you'll have enormous disruption. I mean, you can pay the interest on the debt and not pay Social Security. You could pay Social Security and not pay the interest on the debt. There's a lot of options, but you are in this country spending about 3.7 trillion a year and you're raising about 2.3 trillion a year and there is no magic that keeps a lot of people from looking for checks in the mail the next day when you've— when you face up to that and can't borrow.

BECKY: I saw something like three million checks go out every day from the US government.

BUFFETT: Yeah.

BECKY: And that even trying to stop the— they'd have to rewrite all the computer code to try to come up with a way to not send out that much money every day.

BUFFETT: Yeah. Well, I hope that they decide to cut Social Security, they pay it alphabetically.

BECKY: Well, there are a lot of people who say that's the problem, though. Why is Social Security not means tested? Why is Medicare not means tested? Why aren't we doing something to solve some of these long-term problems at this point?

BUFFETT: And that's a real question and the question is whether you're better off making decisions on those things at the point of a gun or whether there's enough maturity in a Congress that they face this, just like they faced 120 percent debt of GDP back after World War II. You know, we've got...

BECKY: But these problems— these problems aren't new. These problems aren't problems that have built up over decades and there hasn't been a Congress that's been mature enough or a president that's been mature enough to take this head on.

BUFFETT: I can— I can— I can end the deficit in five minutes.

BECKY: How?

BUFFETT: You just pass a law that says that any time there's a deficit of more than 3 percent of GDP, all sitting members of Congress are ineligible for re-election. Yeah. Yeah. Now you've got the incentives in the right place, right? So it's capable of being done. And they're trying to use the incentive now we're going to blow your brains out, America, you know, in terms of your— of your— in terms of your debt worthiness over time, and that's being used as a threat. A more effective threat would be just to say if you guys can't get it done, we'll get some other guys to get it down. And incidentally, we had— we had Simpson-Bowles, you know, almost eight or 10 months ago.

BECKY: Right.

BUFFETT: It's a perfectly rational start and you had 11 out of 18 sign onto it and then this Congress that seems so concerned about things now, totally ignored that situation, you know.

BECKY: All this people will say it was the president's commission and he ignored it, too, and he went with a plan that handed more money to constituencies to make everybody happy.

BUFFETT: Well, there's plenty of blame to go around.

BECKY: Is there anything that corporate America can do or should be doing to help out?

BUFFETT: Well, I think that corporate American probably should convey the same message I'm conveying, that shame on all of you. I mean, I'm not talking about Republicans or Democrats, that the idea that the credit worthiness of the United States, sure, we'd pay the bills later on and everything. But somebody that's disrupted payment has a different payment history than somebody that's always paid on time. And you know, if you have a habit of paying all your bills late, you know, that will have an effect on how people regard you in the credit market later on. So...

BECKY: Even if it's not— even if it's not the bond holders who are getting the short end of the stick, even if it's other areas of government, whether it be veterans or Social Security?

BUFFETT: I think if you have it— if you're the secretary of the Treasury and you have a choice the day after August 2nd of shorting somebody 4 billion each day and one of the choices is to not send out Social Security checks and the other checks, the other choice is not to make a big payment to the Federal Reserve, which owns a whole bunch of bonds, I think the checks will go to the Social Security people. That's who I would send them to.

BECKY: Why?

BUFFETT: Oh, because I would just figure that those people are more vulnerable than the— if the Federal Reserve, which owns 2 1/2 trillion of federal obligations now does not get a check tomorrow, they can handle it.

BECKY: Mm-hmm.

BUFFETT: They just print more money. But if people all over the country, they spend their Social Security check sometimes, you know, within hours of when they get it. And they're living hand to mouth, don't get it, there's no question in my mind who I'd send the checks to.

BECKY: Although isn't that part of the catastrophic concerns that if you miss a payment to the bond holders, to the Treasury, that you automatically trigger a downgrade? And that's the unknown. If the United States is no longer at a AAA, no argument that Social Security...

BUFFETT: No.

BECKY: The retirees who are waiting on their checks who need this money need this money. But if you trigger a downgrade, that that has all kinds of unforeseen consequences, that that's the big concern?

BUFFETT: That has implications, but I would say if you don't send out Social Security checks, I would— I would hate to think about the credit meeting at S&P and Moody's the next morning.

BECKY: Right.

BUFFETT: You are not AAA— if you're not paying millions and millions and millions of people that range in age from 65 on up, money you promised them, you are not a AAA.