I would like to offer, unfortunately, congratulations to Standard and Poor's for trying to improve their services. After getting so much wrong, they are making an honest effort to get something right and have taken down the U.S. credit rating one notch. And for that they are being excoriated by everyone from Tim Geithner to Warren Buffet.
Their major criticism stems from the idea that the U.S. has a printing press and therefore can never default on principal and interest payments. Therefore, some pundits are claiming that the credit ratings agency had no right to consider the decline of the dollar and the reduction of its purchasing power when making their determination to take Treasuries to AA+.
Warren Buffet said today that he would continue to buy Treasuries even though they returned zero interest and that the U.S. central bank would guarantee any such default to be impossible. In other words what he and others are saying is that the United States doesn't need to offer any interest rate at all-even in nominal terms--on any of its debt and shouldn't bother taxing its citizens either. If investing geniuses like Warren Buffet are willing to buy Treasuries regardless of their yield and our ability to pay through legitimate taxation, then why bother going through the ruse at all.
In fact, all a ratings agency needs to do in order to provide a AAA credit rating to a country's debt is go through the rigorous work involved in determining if a country has a central bank. As long as they can print money and destroy their currency there is no chance of a default. To follow this logic, Weimar Germany and Zimbabwe debt should have held AAA credit ratings throughout those hyperinflation crises.
What Standard and Poor's is warning about is the possibility of an inflationary death spiral where the debt to GDP ratio becomes intractable and the Fed is then forced to massively monetize debt in order to keep interest rates low and the U.S. solvent-Europe is in this position right now and the U.S. is not more than several years away. However, inflation is anathema to the bond market and yields eventually soar despite of, or perhaps more appropriately, because of the central bank's efforts. The country eventually collapses through the decimation of the middle class.
What Standard and Poor's is trying to accomplish is to warn the U.S. to get its deficit, which is growing at 10% of GDP, down in the low single digits as soon as possible. For that they should be congratulated and not vilified.