You see, Krugman's a proponent of even more deficit spending and unchecked, centralized government. As such, he treats the very rational reactions to U.S. deficit spending by rating agencies as personal affronts.
OK, so Standard and Poors [sic] has warned that it might downgrade the US one of these days. At first read, what it says doesn’t seem too silly: it lays stress, rightly, on political gridlock. The point should be that the US is perfectly capable both of running large deficits now and getting its fiscal house in order over time; but not if the parties cannot agree on any kind of solution. What we do to spending this year or next is irrelevant.
That said, it’s worth remembering that S&P downgraded Japan in 2002 — and here’s what happened:
Japanese bonds became known as the “trade of death”, because people kept betting on an interest rate rise, and it kept not happening.
So, no big deal.
No big deal.
Dimwit (or propagandist) that he is, Olberkrugmann omits four salient details as context:
• Japan has a huge domestic market for its bonds as its citizens routinely convert savings into government bonds for patriotic reasons, not necessarily because they're sound investments.
• The Obama deficit spending is far worse than we've generally been led to believe: "The bottom line, and probably the main reason for the implicit S&P downgrade of the US, is that comparison [of] the President's budget to the CBO baseline indicates that deficits are expected to rise by 41% over the next 10 years: the CBO projects a deficit of $6.7 trillion while the President's number is $9.5 trillion, a 41% increase or $2.7 trillion." Oops.
• There's a sovereign debt crisis unfolding as we speak with the Greek 2-year bond yield passing 20 freaking percent today.
• And true inflation -- not the bogus "CPI" number -- is running wild with oil, gold, silver, and many food commodities all spiking.
This kind of note from Krugman reminds us why he omits his most important experience from his bio: serving as economic adviser to Enron.