Credit ratings are only supposed to predict risk of default; if a loan denominated in dollars is repaid in dollars, the loan is satisfied. They don't have to also predict what the real value of that repayment will be in other currencies.

What we're talking about is: What is the risk of default of the tbills issued by the US treasury. It's conventionally considered that AAA means "1 in 10,000" chance of default.

Considering that tbills are issued with "the full faith and credit" of the United States and that it's against the US Constitution to default on them, the agencies have historically rated the debt as AAA.

And yes, technically, the US could not default and still pay back worthless bonds by deliberately hyper-inflating the currency.

Doing so would also make worthless all of the private debts demoninated in US Dollars and effectively destroy the US Economy.

While it's certainly possible that could happen, it's quite remote. Quite.

The ratings agencies DO factor inflation risk into their ratings, and are on record multiple times publicly citing inflation risk as a reason. The ratings agencies know that default risk is not the only type of bond investment risk and they rate accordingly -- their track record might be questionable but they're not stupid. You are absolutely right with this comment.

For those who don't understand what's the problem with inflation so long as the bond is repaid, imagine you buy a 10-year, $1,000,000 dollar bond paying 10% interest from the Weimar Republic in 1918. You get $100,000 per year. By 1923 the Mark is worth a trillion times less than it was when you bought your bond, so the resale value is now the 1918 equivalent of $.000001 and the annual interest income is $.0000001. You complain about this to your friend, and he points out that Weimar is still rated AAA because they obviously can print an infinite amount of money to meet their obligations. Do you feel consoled? What kind of interest rate would you require to consider buying another bond?

The United States most likely won't see this kind of inflation because it doesn't have the problems Germany had, but it could certainly see enough to drop the rating to a low A if things really got out of hand.

This argument is fallacious (not that its not kicked around a lot).

The point is that the US treasury will pay its debt. The value of the dollar simply a different question.

By your argument (and apparently, some of the rating agencies'), a supposedly necessary downgrading of treasure bonds would require the downgrade of every existing dollar denominated bond in the world - ie, nearly every AAA bond. Oddly enough, Moody's isn't threatening to do this.

Isn't all of its debt dollar-denominated?

edit: Now that I think about, it isn't. They have inflation-indexed bonds as well. The more they print money, they bigger their debt grows!

http://www.treasurydirect.gov/indiv/products/prod_tips_glanc...

Yes, but which agency determines the rate of inflation? :)

At the end of the day, politicians could mandate that the government statisticians lie about the inflation rate (make it artificially low to lower CPI-index bonds payout rate).

But the currency markets would not be so easily fooled.

That's a meaningless statement. The US holds debts denominated in dollars. If it can print money at will, by definition it cannot default.

You would be correct if they held debts denominated in other currencies, like virtually every other country in the planet.

Where did I make any claim related to that? The only remark I made was that, "entity X can print money at will" does not imply "entity X has AAA status", as the comment I replied to seemed to imply.

I did not check this, but Zimbabwe definitely did not have an AAA rating in, say, 2008.