By the end of this year, we will have a good idea of whether there will be another credit downgrade on Government Treasuries by Moody’s or Standard and Poors, or both.
If there is another credit downgrade, possibly two credit downgrades in the next year or two, the Government may be forced to raise revenues. If the government is forced to raise revenues, the stock market will take a significant hit. The amount of the hit will depend somewhat on if markets perceives the Government raised rates mostly by choice, or was forced to raise rates.
Once rates are increased, if accompanied by spending cuts, the affect on the economy will be dramatic. Government spending cuts are the opposite of stimulus. Most Government spending cuts result in a person or a company receiving Government monies no longer receiving them. An increase in Government revenues will also mean somewhat less capital in the hands of individuals and companies.
The biggest single pressure on the Government at that point will be that it will be significantly more difficult to deficit spend. Payments on the debt will be higher, and there will great pressure on Government to not deficit spend anywhere to the degree it has up to that point. The biggest negative may very well be a significant loss of prestige and power around the world as the Unites States will have been forced to fundamentally change it’s economic model, and in the aftermath is less powerful and will be a smaller influence around the world.