A warning by Standard & Poor's about the possibility of a credit rating downgrade for the U.K. sent a shockwave across global bond and equity markets. With the U.K. government spending and printing large sums of money to resurrect the economy, analysts are expressing fears about the rapid accumulation of debt-with public debt possibly rising to a share of almost 100 percent of GDP within the next four years.
Even the utterance of these words by a credit rating agency focused attention on the U.S., since the U.K.'s playbook , i.e. quantitative easing and deficit spending, was copied straight from the Fed and Obama administration's tactics. The dollar took a big hit and longer term bond yields soared to their highest levels since last winter. Maybe this is a one day fluke, maybe not. Given the unprecedented growth in government spending slated to occur, the U.S. will need a lot of countries to buy bonds to fund the ballooning debt; however, a lower credit rating could only spook potential buyers away and fuel a run on the dollar. Any way you look at it, the Fed and the Treasury are walking a thin line. Their efforts to re-flate the economy will require perfect timing, but mostly a lot of luck so as not to 1) damage the greenback's reputation; 2) crowd out private investment; and/or 3) fuel higher inflation expectations.