What if the credit rating of US government got downgraded?

We are taught that the yield of US Treasuries is the risk-free rate, meaning the credit rating of the US government is perfect. The notion that US government will never default on her debt has prevailed for so long that a downgrade is beyond our imagination.

Unfortunately, the worst case scenario - a possible downgrade - looms large as the drama of Freddie Mac and Fannie Mae unfold. The pundits are right that the twins cannot collapse simply because they are too big to fail. How big? The total gross domestic product of the world is about $50 trillion. Together Fannie Mae and Freddie Mac are responsible for about US$5 trillion worth of U.S. home mortgage debt i.e. they own or guarantee about half of the country's $12 trillion mortgage debt. That literally means Fannie and Freddie can't be allowed to fail. And government has already intervened.

We are now seeing the subsidizing of these two troubled lending institutions by the Fed, through the Discount Rate window, and at least a partial nationalization by the US Treasury. But, there are inevitably tradeoffs. The immediate one is a further deterioration in the quality of the US government balance sheet. A possible downgrade of the credit rating of the US government isn't that far-fetched anymore, since the government's potential obligations, which currently stand at about $9 trillion, would rise by an additional $5 trillion. Meanwhile, I do not see how any of this is positive for the US dollar. And the smart money has already quietly re-entered the bullion market as shown on the following chart.