S&P announced last week that it was upgrading its assessment of US debt, shifting its outlook to neutral from negative, suggesting that it may restore its highest AAA rating in the not too distant future. Although we may all want to celebrate S&P's vote of confidence in the financial health of the US government, this might be a good time to again ask what S&P was thinking when it downgraded US debt in 2011.

That is not a sarcastic question. When S&P downgrades a company's debt or the debt of a government that does not issue debt in its own currency, the downgrade has a clear meaning. The downgrade means that in S&P's assessment, it is now more likely that the downgraded company or government will not be able to pay off its debt. This means that holders of the bonds face an increased risk of bankruptcy or its equivalent, and may not get back the full value of the bonds.

However, it is difficult to see what this means when applied to the United States, which does issue debt in a currency under its control. If the United States is borrowing $100bn then it is promising to pay off its bonds with $100bn. Since the United States controls the printing of dollars, it is difficult to understand what S&P could mean when it downgraded the country's debt. Did it mean that they thought it was possible that the United States government would forget how to print dollars?

There is a plausible, albeit remote, story of default. We did see a political impasse between President Obama and the Republicans in Congress two years ago that could have conceivably led to a situation where the government would be legally prohibited from paying off its bonds due to the debt ceiling.

It's not clear that this was ever a real concern. After all, there are some legal issues surrounding the debt ceiling. (The constitution does state that the debt should be honored.) It is not clear what would happen if the president were to ignore the debt ceiling and continue to meet debt obligations and other expenditures mandated by Congress.

Also, it seems difficult to believe that even if we ever did reach the ceiling and a debt payment was missed that Congress would not respond quickly to the resulting financial turmoil. In that scenario we might see bond payments delayed by a few days, but it would be difficult to view this as a default.

More importantly, from the perspective of the S&P downgrade, this would be entirely a political matter. The default or pseudo default would not be the result of the government's financial situation; it would be the result of political gridlock. If the increased possibility of this sort of political gridlock was the meaning of the S&P downgrade then it should have stated this fact explicitly. Instead it devoted most of the pages in its downgrade report to a discussion of the country's financial situation.

Some analysts have claimed that the downgrade is based on S&P's assessment that if the government were to continue to run large deficits then the Federal Reserve would eventually allow inflation to rise in order to reduce the real value of the debt. In this view S&P was not worried literally about default, but rather that the deficit situation would lead to higher inflation in future years.

There are two problems with this view. First, if the concern was an increased possibility of future inflation, then S&P should have downgraded every bond that was denominated in dollars. If the S&P sees an increased probability that inflation will erode the value of the dollar and that it is the basis for its downgrading of US debt then it should similarly downgrade every other asset that will be paid back in deflated dollars. S&P did not opt to downgrade all other dollar denominated assets, which would imply that the downgrade had little to do with inflation.

More importantly, S&P has not been in the business of making inflation predictions. It did not downgrade government debt in the 1970s even as inflation rose into the double digits. Nor did it downgrade any of the bonds of private companies whose value was also being eroded by inflation at the time. In other words, if S&P's concern was inflation and not default per se, this would be a major change in approach that it has never announced to the world.

In short, it is not easy to give meaning to S&P's downgrade of US debt. S&P could not really believe that the United States would ever be in a situation where it could not pay off dollar denominated bonds and it doesn't make inflation projections, so whether or not the debt burden might have led to inflation was beside the point.

The most remarkable part was that this downgrade figured so prominently in budget debates over the last two years. But of course we are talking about people who took the Reinhart-Rogoff 90% debt cliff seriously also. That is the sorry state of the budget debate in Washington.