Krugman:
1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity
2. Fears that this austerity will depress the economy send stocks down
3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged
4. This leads to calls for even more ill-advised austerity, which sends us back to #2.
It's shockingly amazing how policy makers (including the Obama administration) have latched on to the notion that debt is somehow relevant to anything tangible at the moment.
Wall Street is concerned about a cratering economy, hence it tanks. Where do they put their money? U.S. debt—the same U.S. debt that the S&P just downgraded.
And voters? Remember them? They want jobs. Give them jobs, and they'll be happy.
All the yapping about debt, or efforts to impose yet more austerity, won't create a single job.