Krugman makes a pretty decent point about the aftermath of the S&P downgrade. If the markets were heeding that message you’d expect the rates the US has to pay to borrow money would be rising, as it became harder to convince investors that owning US debt is essential risk free. But the reverse is happening so far today: the rate has dropped pretty consistently through the day. In other words, the reaction to market volatility seems to be for people to rush and buy treasuries.
Now, speaking as a non-economist, I’m not so wedded to the idea of market rationality that I think you can’t have a lot of market instability triggered by the downgrade and simultaneously have investors reacting to the instability by buying up US debt. But that’s just me. In any case, it does suggest that in general investors have not put much stock in the S&P’s judgment.
