Inflation May Have Shaken The US Creditworthiness Narrative

The Fitch downgrade should push America to face its fiscal reality

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+. But attention should also be paid to the role of inflation, which has returned after a long hibernation, piercing naive notions of America's absence of risk.

The Fitch downgrade was the first since Standard & Poor's took a similar step in 2011. Back then, thought leaders like Warren Buffett and Alan Greenspan rushed to America's defence, pointing out the absurdity of US credit risk. "In Omaha, the US is still AAA," Buffett said, citing its ability to print money at will. "In fact, if there were a AAAA rating, I'd give the US that." Greenspan put it this way: "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."

Of course, Buffett and Greenspan were nominally right. Across global financial markets, investors with skin in the game view Treasury securities as the safest and most liquid market to park their money. And even if the US's finances went haywire, the government would still control the printers for the world's reserve currency.