Henry Blodget links to a disturbing story about S&P, the credit rating agency, threatening to downgrade US debt if it doesn’t deal with the budget deficit:

The United States government needs to take steps to preserve its top AAA-rating, a Standard & Poor’s Ratings (S&P) official told Dow Jones newswire in an interview published on Thursday.

The measures taken in response to recommendations President Barack Obama’s commission on fiscal responsibility would be crucial in the view S&P takes on the U.S. credit rating, he said.

“It is very important for the credit standing of the United States that the Congress considers very carefully what the fiscal commission proposes,” John Chambers, chairman of S&P’s sovereign rating committee, was quoted as saying.

“It is very important for Congress to take the required steps.”

S&P, like the other rating agencies, basically gets paid by the banks, and in the run-up to the crisis wrote their projections to favor the banks moving around risky securities that destroyed the economy. Not one thing they can say is credible.

In Dodd-Frank, the rating agencies were partially reformed, with an additional SEC study to remove the conflict of interest set to come. So you’re welcome to read this as a reaction to that.

It’s literally impossible for the US to default on debt, especially when the debt is denominated in its own currency. This threat looks more like a signal to the markets. Rising debt is supposed to eventually lead to inflation, but during this crisis that hasn’t transpired; in fact, deflation is more likely. The bond markets have beaten down long-term debt yields, now sitting at 2.53%. Rather than reacting to the state of the markets, S&P seeks to influence them.

It’s ridiculous and without credibility. But I fully expect some VIPs in Washington to take it seriously.