Greece's fiscal problems are turning into one of those endless sagas, the kind we watch unfold at Thanksgiving every year. Aunt Daphne is going to leave Uncle John! No, they're in counseling! Wait, now Aunt Daphne is breaking up with the counselor, too! The rumors are starting to take on a toxic life of their own, driving up the yields demanded on Greek debt—which in turn, makes it less likely that they'll be able to finesse the crisis with a moderate infusion of outside cash.
Paradoxically, that seems to be good news for us, pushing our debt yields lower; we are the proverbial "any port in a storm". This phenomenon is what makes it so difficult to assess the risk of US fiscal trouble. On the one hand, the US budget is clearly on a completely unsustainable path, and frankly, our household budgets don't look so much better. This should make investors nervous about our bonds.
And as far as I can tell, they are. But they're even more nervous about bonds everywhere else . . . because everywhere else has worse demographic problems, and a less impressive history of economic growth. So they aren't signalling their nerves the way we'd expect, by slowly and steadily pushing up bond yields.
But that in itself is a vulnerability. If at any point we are not seen as the safest game in town, we will take a gigantic—the better word might be "catastrophic"—hit on our bond interest. If there's somewhere safer to park our money, suddenly we lose the premium we currently enjoy for having bonds considered the "risk free" rate. So while our super-sterling credit rating may delay the onset of a fiscal crisis, if we ever let it get to that point, the onset may be even more sudden and disastrous than these things usually are. All the more reason to start getting our fiscal house in order now.