Even Paul Kedrosky, who is normally irreverant in covering economic news is calling the changes in US debt markets “hugely important developments“.

The price of long-term US debt has been falling steadily for the past six months, with an acceleration in recent weeks, and a “massacre” taking place just yesterday.

This is really scary. As Ambrose Pritchard-Evans points out, “Governments worldwide have to raise some $6 trillion in debt this year, with huge demands in Japan and Europe.”

With falling prices, yields go up. There will be increasing competition for scarce capital, which means that eventually borrowing costs are going to increase for everyone.

Tom Vanderwell over at Bloodhound Blog has a great post on how this might impact housing markets.

If governments are unable to borrow to fund their “stimulus” programs, then they will have to resort to any number of otherwise deeply unpalatable options:

1- not spend the money. otherwise known as austerity- cut salaries, cut programs, generally reduce the size of goverment spending. (examples: Latvia, Ireland, Iceland…)

2- take the money peacefully, otherwise known as taxation- not terribly popular either. (examples: just the UK that I can think of so far)

3- take the money forcefully. Hugo Chavez and what´s he´s done to Venezuela as an example of this.

4- just create the money. Hello Zimbabwe?

Of all the alternatives, 1 is really the most responsible. But 4 is the least painful short term and so the easiest to get away with.

No wonder some investors are making statements like they are “100% sure that the U.S. will go into hyperinflation“.

Keep a close eye on America´s yield curve…if it continues to steepen, then get ready for the start of “crisis chapter 2″.