Why? Firstly it gives Osborne the cover for further cuts to public spending and destruction of public services, he will argue that to win back economic credibility further action must be taken to reduce the debt and debt payments.
The Tory led, banker backed government wants to take the cover of the crisis to re-engineer the state and drive down the living standards of working people. He has no interest in getting the economy moving.
Osborne has described the downgrade as "proof that, in the current global situation, Britain cannot waver from dealing with its debts" while the Shadow Chancellor Balls has claimed it was a "significant warning." They are both wrong. It proves nothing and signifies less.
http://www.newstatesman.com/politics/2013/02/osborne-humiliated-uk-loses-aaa-credit-rating
When it comes to rating UK government bonds, what the ratings agencies are assessing is simply the probability that the UK government does not pay back, in pounds, the money it has borrowed. Pounds which can be - and as we have seen over the past two years, have been, even in far less extreme circumstances than a potential default - created electronically by the Bank of England.
In the event of nuclear war or a Godzilla attack, it is possible the UK government might not pay its debts. So whatever else happens, holders of gilts, who are primarily our pension funds, will get their money back.
Saying that there is any meaningful probability that the UK will default on its debt - which is what downgrading the UK means - is not to take a particular view on the UK economic or fiscal outlook. It is simply not to understand what you are talking about.
So how should a government, and its people, respond to the rating agencies? The former should, and the latter in my view will, simply ignore them. We should say "We couldn't care less what the ratings agencies say. The UK can and will pay its debts".
Meanwhile, Ed Balls should make his arguments for an alternative approach to monetary policy on the merits of the case, not attempt to bolster them by appealing to the judgement of these discredited and irrelevant organisations.
Monetary policy is too tight; resulting unnecessarily high levels of unemployment, this is doing long term social and economic damage. We need the Bank of England to provide debt free money (quantitative easing) to invest in infrastructure, new hospitals, schools, alternative green power and to assist in the development of a modern manufacturing base so that we can produce high quality and sustainable goods.
The Bank of England is our national investment bank and it can pay off our debts, as witnessed by the Quantitative Easing programme which has already bought £375bn of government debt off of our creditors.