When it comes to the US’s creditworthiness, much has been made about politicians’ recent brinkmanship around the debt ceiling and the consequent erosion of “confidence in fiscal management,” as Fitch Ratings put it in its downgrade of the US from AAA to AA+ on Tuesday. But some attention should also be paid to the role of inflation, a phenomenon that returned after a long hibernation, piercing naive notions of the nation’s inherent absence of risk.
The Fitch downgrade was the first since Standard & Poor’s took a similar step in 2011. Back then, thought leaders in investing and economics — including Warren Buffett and Alan Greenspan — rushed to America’s defense, pointing out the absurdity of contemplating credit risk from the US government. “In Omaha, the US is still AAA,” Buffett told Fox Business at the time, citing its ability to print money at will. “In fact, if there were an AAAA rating, I’d give the US that.” Greenspan put it as follows in an August 2011 appearance on NBC’s Meet the Press with David Gregory (emphasis mine):
Gregory: Are US Treasury bonds still safe to invest in?
Greenspan: Very much so. I think there’s — this is not an issue of credit rating. The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.
Buffett and Greenspan are nominally right, of course. Across global financial markets, investors with skin in the game universally view Treasury securities as the safest and most liquid market to park their money. And even if the US’s finances went truly haywire, the government would still control the printers for the world’s reserve currency. Theoretically, the money-printing would cause inflation, but you probably wouldn’t consider that a credit risk per se, which begs the question of why credit-rating companies feel the need to weigh in. As the economist Gerald Dwyer eloquently put it at the time, US Treasury debt is “nominally risk-free, but not really risk-free.”
Ultimately, it’s not just a question of semantics but also of time horizon. If you print money, inflation rises, and that at first has the effect of increasing nominal gross domestic product. The initial result is a decline in debt as a percentage of GDP (and that, by the way, is what’s happened in the US since 2020). But in the long run, markets demand compensation for persistently high and volatile inflation, leading to sustained increases in real borrowing costs, which will eventually drive up relative debt loads and become a credit issue.
In 2011, it was understandable for Buffett and Greenspan to go around making such points about printing money because inflation was a relic of the past and the long-term downsides seemed (at worst) wildly theoretical. Some people were even starting to think that inflation might be dead. When Greenspan mentioned printing money on Meet the Press, Gregory didn’t retort “But what about inflation!” because it was such an afterthought in the national consciousness. Today, such points would feel tone-deaf because the American public has just lived through its worst inflation scare in four decades, and the effects are still lingering. Households, governments and credit-rating companies are all thinking more about it.
