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Britain, U.S. Solvency Questioned

Much of the losses in equity markets across the globe on Thursday were the result of poor economic data as well as concerns over the credit worthiness of the Unites States, UK and other western borrowing soverigns. The scare has been in place for weeks and months with the announcement of historically swollen stimulus packages and bailouts in the U.S. Yet until the Treasury actually began auctioning off debt to pay for the 1.9 billion in recessionary spending, the fears were written off as noise and only slightly discounted by the market. 


Standard & Poors announced a downgrade of the U.K. from "stable" to "negative" as the country has organized spending efforts ranging to 100% of GDP. Similar fears then turned to the U.S. where similar spending has occurred, causing Treasury yields to spike across the board. The U.S. has committed to a potential 1.9 Trillion dollars of debt in the past 8 months and has begun selling Treasury obligations as far out as 30 notes. As previously discussed in Who Picks Up the Tab, the Fed has committed to buying up to $300 billion of Treasury debt to keep long term interest rates low. It turns out that the U.S. currently holds about $11 trillion of debt and is on pace for $14 trillion in GDP over the course of 2009, putting U.S. debt at approximately 79% of GDP.


While the U.S. is comparably better off than Britain, there is more pressure to keep the AAA credit rating to avoid a collapse of the World's strongest currency. It would seem that after enough time any paper currency, seen as most stable and held as a means of security, would eventually collapse. Keep a close eye on the behavior of U.S. Treasuries as the market prices in the likelihood of such an event. 

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