It took a while for economist Dean Baker to stop laughing over Standard and Poor's absurd threat to downgrade US debt, but once he did, he got to the heart of the farce:

What does it mean that the U.S. government’s credit rating is impaired? We borrow in dollars. Guess who makes dollars?

Imagine if I printed up IOU’s that were payable with my IOU’s. Would S&P think that I might default? This makes no sense. Countries that borrow in a currency they issue will not default unless we get an absurd situation where politicians try to make a point by forcing a default (as in not raising the debt ceiling). It will not happen as a result of budget finances.

There is a potential issue about inflation and higher future interest rates (and therefore lower bond prices). However, if this is the event that S&P is warning against, then the warning should have been applied to all debt that is denominated in dollars, both public and private. If inflation erodes the real value of U.S. government debt, it will also erode the real value of the dollar denominated debt issued by Goldman Sachs and General Electric.

Are these two companies now on the watch list for downgrades along with the rest of corporate America? I don’t think so.

Much more, and well worth the read.