The Wall Street Journal ran a story today suggesting that some people are beginning to question the US government’s AAA bond rating.
As bearish as I am on the dollar, I must say that I think that downgrading the rating of US government debt is something that will not happen in my lifetime. The reason is simple: US government debt is denominated in dollars, and the US government effectively has an infinite supply of dollars at its disposal. It will never run out of dollars, so it will never default on its debt.
Note that this is not to say that holding US government debt is riskless. I do believe that owners of US government bonds are facing more and more currency and inflation risk with each passing month of US profligacy. But worrying about the US government’s ability to repay the bonds (albeit in future dollars that could be worth significantly less) strikes me as an overreaction.