Britannia Takes a Hit on the Starboard Bow

The financial world is abuzz with the news that Standard & Poor's has issued a warning that the United Kingdom might lose its coveted AAA credit rating. S&P cited the nation's massive budget deficits and the mounting national debt, which could soar from 49% of Gross Domestic Product last year to a projected 97% by 2013. That's quite a comedown for Britannia, whose currency, the pound sterling, once played the same exalted role as the dollar in the world economy.

After briefly fleeing the pound and buying dollars yesterday, reports the Wall Street Journal, some players began worrying that the United States might be next and began deserting the dollar.

"It's the pace of deteriorating in finances that is the driving factor here," said Huw Worthington of Barclay's Capital. "The U.K. and the U.S. have fallen hard and fast." According to the Journal, the U.S. national debt stood at 44% of GDP last year and is forecast to rise to 77% by 2013. S&P reaffirmed its AAA rating for the U.S. but anyone looking at the Obama administration's projections of continued massive deficits in the years ahead has to wonder how long.

What it means to the average Joe. The bond-rating news is important to more than bond traders, currency speculators and other members of the electronic herd, as Thomas Friedman dubbed the fickle, fleet-footed money managers who shift capital around the world with a click of computer mouse. A lower credit rating will translate directly into higher interest rates , which will add that much more to the strain of carrying a massive national debt.

The finances of every major industrialized country are deteriorating -- that happens during recessions. Unlike past recessions, no one's fooling themselves that anyone will return to a balanced budget: Any improvement in the economy will be offset by increasing obligations for old-age and retirement benefits.

When a single nation runs up big deficits, it has little impact on global capital markets. When every major nation runs chronic deficits and piles up national debt, governments will begin "crowding out" businesses and consumers in the quest for capital. Interest rates will rise, and that will hinder the economic recovery. Debtors will suffer, and cash will be king.

(Photo credit of the HMS Britannia, sunk by a German U-boat in 1918: Battleships-Cruisers.co.uk.)