National debt continue to dominate economic and political talk. This week Moody’s bond rating agency downrated Japan’s national government debt. The Serious People and Talking TV Heads will be full of dire prognostications for Japan. Of course, I don’t see why we should believe Moody’s or S&P anymore after they reassured us for years that sub-prime mortgage-backed securities were AAA rated secure stuff.  It’s clear they live in an alternate reality world. And that’s where the dire prognostications for Japan belong too – in an alternate reality world, not this one.  Krugman in his NYTImes blog reminds us what happened to Japanese interest rates the last time their debt was downrated to only AA, not even AA-:

Amid all the stories about the S&P downgrade of Japan, I’ve seen hardly any mentions of the fact that Japan was downgraded below Botswana in 2002. And here was the effect on the interest rate:

Eurostat

Nada. In fact, if you bought JGBs just before the downgrade, you ended up doing very well.

I’m not saying that Japan’s long-run budget situation isn’t troubling. But the rating agencies (a) don’t know anything the rest of us don’t (b) are way too quick to downgrade sovereign debt, especially as compared with their what-me-worry attitude toward private securities (c) have very little actual influence on market.