As I've said before, that's a weird rationale - shunting two significantly better players right down the order (so far down that they are unlikely to be in a position to build a substantial innings) just to accomodate an inferior batsman. Moreover, it completely glosses over the fact that number four is one of the most important positions in the line-up, and that you're making out number seven to be some sort of important position in the line-up (very unlikely with Australia's top order and on the flat pitches in the Carribean). Australia's prospects in the World Cup are not going to hinge on who bats at seven. Whereas they most certainly will hang on how our top order performs.
Hussey at seven, and facing 10-20 balls per innings? No thanks. Our chances are not going to hinge on 10-20 balls out of a 300 ball innings.
Watson can do a perfectly good job at 4 though. And of course, the order can quite easily change as needed.
Australia will be a stronger team with Watson at 4 and Hussey at 7 than the other way around, most of the time. If Australia are 2/200 after 40, obviously Hussey would be a better choice that Watson, and that's when you'd change the order, but Watson's going to perform a lot better with time to build an innings, while Hussey is perfectly capable in any situation. You'd have a point if Watson was an average batsman in general, but he's clearly not. He's a very successful batsman in the top order but struggles in the late overs when not set, while Hussey averages 80 batting at 6 and 7.
The fact is, Hussey is the best batsman in the team, give or take Ponting. He's better than Clarke and Symonds as well. The reason he bats below them is because he's the most flexible batsman available. Watson needs to be in the team for the flexibiltiy he adds through performance in two disciplines, and that flexibility will be hampered if he's batting down in the order. And, when it comes down to it, Australia are going to make more runs in limited overs cricket if batsmen who need time at the crease bat higher in the order, which is why Symonds bats at 5, and why Watson should bat at 4. Watson's not going to make 50 off 90 and waste deliveries or anything up the order, and indeed has the potential to play a similar role to Martyn I think, and play some pretty good longer innings in the middle order, but has shown many times that coming in with a few overs left he's nothing special. Hussey on the other hand will maximise whatever overs he does get, whether he comes in at 2/200 with 10 overs left, 5/80 with 30 overs left or 5/300 with two overs left.