I think it lies somewhere in between.
If what you say is true, the coach is not doing the players any good by blowing smoke. Its good to pump kids up, but on the same token, you cant over sell them.
On the other side, no matter how much smoke the coach is blowing, is it really your sons place to sit on the bench and down play the teams play and accomplishments? When these kids start talking about their 11th place finish or whatever, I'm sure they are getting heated when the kid not playing tells them it means nothing. I'd be upset too. Nothing personal, I just think it would be best for him to keep the peace and just smile it away.
I agree and would have a problem if my kid was sitting on the bench and said something to that fact. I would be the first to have an issue with that. I'd like to think that my son has been taught to respect the game better than that, but hey, kids will be kids. My son is not on the fall travel ball squad. He was only responding those who boasted in his face at school, and if it was a top 20 finish it would be huge accomplishment for them and praise would be well deserved.
If these kids are high school age and entering tourneys where they end up in consolation games, I would imagine that it doesn't matter what the coach tells them. They are old enough to see the competition and understand where their individual talent lies. If you've got a jr. seeing 87mph pitching and he's only throwing 70's and losing, surely he's old enough to be able to self-evaluate that.
Now, where I see a real disservice is high school teams that play weak schedules in a weak conference, occasionally go out and play AA-level tournaments and are mislead by coaches that they're playing top teams and doing well. Not exposing them to higher levels and claiming that they've accomplished something can easily mislead a kid into thinking he's got something when he doesn't.