Rating agencies such as S&P and Fitch, which issued a bizarre negative outlook for Queensland not long ago, really have no idea about macroeconomics or public finance. Nobel prize winning economist Paul Krugman has a brilliant piece slamming S&P over the just announced downgrade of the US from AAA to AA+ (S&P and the USA). Choice excerpts include:

…it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.

…S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.

So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.

Krugman is absolutely right. The US remains the world’s most productive and innovative economy and will no doubt bounce back from its current malaise. Certainly the inevitable plunge in the US dollar will help it boost its exports.

It’s very likely the US downgrade will increase demand for Australian Government bonds and could well see the Australian dollar soar to new heights.