1) the s&p downgrade affected fixed income instruments across the US except for the very thing that was downgraded.
2) floating rate bonds are down 7%, yielding nearly 7%
3) High yield bonds are down 3 to 4%, yielding 7%+
4) municipal bonds are down 5%, probably yielding nearly 9% on a tax equiv basis
5) equities are down 3.4% and down 15% in a month
6) many stocks, e.g. Siemens, Dow chemical are now yielding nearly 4%.
If you consider the # of unemployed + # of discouraged workers and assuming their contribution to GDP was maybe half the average GDP per capita for the USA, this means that US GDP should be lower by $1.2 to $2 trillion dollars so not $14.12 but maybe 12.1 to $12.9 trillion in GDP. (This is all assuming a natural unemployment rate of 5% or so).
The last time the US was at those GDP levels was 2004 to 2005 when the S&P 500 ranged from 1,000 to 1,150, pretty close to where it is today.
GDP contracted from 14.37 to 14.12 over the 2008 2009 period.
Now if GDP contracted another 8 to 13%, this should result in a stock market valuation of 1000 to 1150 but you can bet we'd first see a market crash unlike anything we've ever seen in history. Government deficit spending has made up this 1 to 2 trillion dollar gap over the last few years (Unemployment benefits, medicare, social security, military spending etc...) but it seems congress, S&P, etc are more willing to stop this spending, which can only mean a contraction in GDP is imminent assuming inflation rates around 2%.
Another route is a coordinated (or not) devaluation of the dollar to monetize the debt, which will oddly result in chaos in Brazil, SE asia, China, etc.. where rampant inflation or currency appreciation will result in companies shifting production to other countries. Quite baffling how US efforts to create inflation shows up in emerging markets but this is the result of neo-mercantilist policies in these countries. Neo mercantilism doesn't work if there are multiple nations attempting to weaken their currencies.
Bank of New York Mellon's fee on cash balances over $50 million is a taste of what's to come. In a sense this fee is equivalent to some measures Brazil has taken to limit inflows that are forcing Brazil Reais appreciation--a tax on inflows. This is a currency war between the neo-mercantlists and free trade countries.
In this nightmare scenario, the US should charge a fee to secure investments in treasuries, given the revolts and instability likely to ensue in neo-mercantilist and 3rd world countries, the relative safety of treasuries, whose 'collateral' or 'assets' is/are ensured by our military.
Anyway, I hope we don't go down that route, neither does any other nation, there has to be a global accord here soon to coordinate a 'rebalancing'.
