Economist Nouriel Roubini says Standard & Poor's decision to downgrade the U.S. at a time of such severe market turmoil and economic weakness only increases the chances of a double-dip recession and even larger fiscal deficits.

"Paradoxically, however, U.S. Treasuries will probably remain the world’s least ugly safe asset: risk aversion, equity declines and a looming slump could even see treasury yields fall rather than rise," Roubini writes in the Financial Times.

However, avoiding another recession “might simply be mission impossible,” says Roubini.

“The best bet is for those countries that have not lost market access – the U.S., UK, Japan, and Germany – to introduce new short-term fiscal stimulus while committing to medium-term fiscal austerity,” he says.

“The U.S. downgrade will hasten demands for fiscal reduction, but America in particular should commit to look for significant cuts in the medium term, not an immediate fiscal drag that will worsen growth and deficits.”

Roubini notes that, until last year, “policymakers could always produce a new rabbit from their hat" to trigger asset reflation and economic recovery.

"Zero policy rates, QE1, QE2, credit easing, fiscal stimulus, ring-fencing, liquidity provision to the tune of trillions of dollars, and bailing out banks and financial institutions – all have been tried,” he says. “But now we have run out of rabbits to reveal."