Equity markets subsequently lost billions worldwide on Monday as they faced up to the facts. America's recent economic momentum has been achieved through massive stimulus with an arguably reckless disregard for how it would be funded. The American recovery can't go on at the same pace if the US is to tackle its debt crisis, which it must do to retain an unblemished credit rating.
S&P has blown a hole in the traditional assumption that there is a "risk free" return from sovereign debt, such as US Treasuries. Unless the politics change, there has to be a higher risk premium for holding US Treasuries, another expense Americans can ill afford.
As someone once famously said, you can't buck the markets. S&P has given America a bloody nose and a stark reminder that if you rely on borrowing to fund your lifestyle then you need to have the policies to make sure someone will keep lending to you. Banks discovered this the hard way in 2007-08. Now politicians are discovering it for themselves. It's undoubtedly a shock but if it goes for America it applies in spades to Greece, Portugal and Ireland – not to mention the UK too.
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