Unraveling markets bode ill for U.S. economic might

By Pedro Nicolaci da Costa - Analysis

NEW YORK (Reuters) - The long shadow of a multi-trillion dollar financial rescue program is beginning to shake investor confidence in U.S. economic supremacy.

In a nervous day in financial markets, dollar-based assets took a rare, simultaneous plunge.

Coming on the same day as a warning from credit agency Standard & Poor's on Britain's AAA rating, the drop in U.S. stocks and Treasury bonds, along with the greenback itself, rekindled concerns about the U.S. Treasury's ability to finance a $1.75 trillion deficit.

"Normally you don't see this confluence," said Howard Simons, market strategist at Bianco Research.

Fearful markets usually translate into gains for Treasury bonds and the dollar and losses for riskier stocks. The tandem, across-the-board declines on Thursday reflected anxiety over the U.S. government's mounting indebtedness as it grapples with the worst financial crisis in generations.

The amounts in question are staggering. The government has said it will need to borrow $2 trillion, or 14 percent of the country's total economic output, in 2009 alone. The Treasury will raise $101 billion just next week.

It has already sunk most of its $700 billion Treasury Asset Relief Plan, or TARP, into propping up struggling banks and other financial institutions. It also juiced up the economy with a $787 billion fiscal stimulus plan.

Moreover, the Federal Reserve has committed to buying nearly $1.5 trillion in mortgage and agency debt issued by Fannie Mae and Freddie Mac, the fallen government-supported mortgage behemoths, along with $300 billion in direct purchases of U.S. government bonds. Minutes from the central bank's April meeting, published on Wednesday, suggested policy-makers were pondering a possible expansion of such programs.