If these circumstances were to occur, the Fed would be unable to do much, if anything, to control inflation, Mishkin said in the report, presented at a conference at the University of Chicago Booth School of Business.

In that case, Mishkin and his co-authors, David Greenlaw, James Hamilton and Peter Hooper, argue that the result could be "a flight from the dollar," according to a summary of the report by noted Fed-watcher Steven K. Beckner writing for MNI.

The report states, "Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates, which in turn make the debt problems more severe ... Countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics."

The authors of the report estimate U.S. net debt, excluding debt held by the Social Security Trust Fund, at about 80% of GDP in 2011, double what it was a few years before. To make matters worse, the United States runs a persistent current account deficit, which is funded by borrowing from other countries.

This puts the U.S. in a worse spot than Japan which, although its debt is much higher as a percentage of GDP, has a large current account surplus and a high savings rate.

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Share prices tumbled from New York to Tokyo. Even resource-rich Australia and emerging markets, including China, saw shares decline following the release of the minutes of last month's Federal Open Market Committee meeting.

What upset the markets was a discussion at the January FOMC meeting about when and, more importantly, how to end the current QE policy.

As someone put it on Bloomberg Radio yesterday, "Would the markets have been happier if the FOMC was ignoring the issue of how to end QE?"

To understand how ending the QE policy might affect the economy and markets, investors need to understand how QE operates.

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With the immediate crisis over, the need for safe-haven instruments such as U.S. Treasury bonds has diminished, sending yield-starved investors scrambling for better returns.

Improving sentiment in the United States, Europe and even in Japan has sent U.S. Treasury bond prices lower. The yield on the 10-year Treasury bond is now over 2.0% for the first time since April of last year, having averaged 1.80% for 2012.

But it's not just improved sentiment that's going to push down bond prices.

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