In "The Problem with Markets," I argued that the strong performance of one high profile market is less than it seems:

People may...believe, as a great many apparently do nowadays, that those currencies and foreign assets that are risky in their own right are nevertheless a better bet than any of the alternatives --- that is, they are the best of the worst.

That's one reason why the U.S. Treasury market has remained buoyant even though Washington is spending and borrowing money like a drunken sailor and wrecking the nation's long-term creditworthiness in the process. From the perspective, say, of a European who is worried about the burgeoning debt crisis in his own backyard, our market might appear to be a safe haven.

In "The Debt-Bomb Rubicon," Dow Jones Market Talk blog offers up some further thoughts on the threat posed by Washington's spendthrift ways, as well as a far more sobering explanation than mine for investors' seeming denial about the risks [italics mine]:

Real Times Economics picks up on the debt theme, noting that the $13 trillion in U.S. national debt equals 88% of projected 2010 GDP (in a post earlier this week, I compared it to 2009’s GDP and arrived at 90%, but little difference; at current growth rates for both it will soon be 100% of GDP.) That puts the U.S. in a dangerous situation. From the Journal’s Mark Whitehouse:

We’re borrowing to bail out consumers who took on too much credit and couldn’t pay, and to support social-security and Medicare systems we can’t really afford. We’re able to do this because financial markets have maintained a surprising faith that we will eventually get our spending under control, and because the dollar’s role as a global reserve currency has kept our borrowing rates unusually low.

The travails of Greece demonstrate the hazard such easy borrowing terms can create. After Greece adopted the euro, markets began to treat it more like any other European economy, allowing it to borrow at interest rates nearly the same as Germany or France. That, in turn, helped Greece get into much deeper debt trouble than it would have otherwise. As a result, it now has to implement austerity measures that will likely yield much deeper economic pain.

I’ll tell you, folks, we are crossing the Rubicon. We are going to be forced into some very hard choices, choices we have been putting off for years, no matter how the economy’s doing. That’s the real takeaway here, that soon no matter how fast the economy is growing, it won’t be able to keep up with our debts.

I disagree with Mark on one point, though. I don’t think our creditors and the markets are giving the U.S. a pass because they believe the government will eventually get spending under control. There simply is zero evidence that that’s going to happen. No, the markets are giving the U.S. a pass because the thought of a sovereign debt crisis in the world’s largest economy, which prints the world’s reserve currency, and which is in times of trouble the ultimate safe haven, is simply too terrifying to even contemplate.

But you’d be wise to do so.

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