From the economist Brad Setser, at his very helpful Council on Foreign Relations blog:
Foreign demand for any US bond with a smidgen of credit risk has disappeared. Indeed, the fall in demand for Agencies over the past three months is more severe than the fall in demand for US corporate bonds (think securitized subprime mortgages and other securitized housing and consumer debt) last August.
Normally, this kind of fall-off in foreign demand would be associated not just with a credit crisis but also with a currency crisis. A country cannot finance a trade and current account deficit without financing, and two big sources of financing for the US deficit — foreign purchases of Agencies and foreign purchases of US corporate bonds — have disappeared. The US, though, isn’t a normal country. The fall in demand for risky US assets was offset by a rise in demand for Treasuries and the sale of foreign assets by Americans.
American debt is less valuable today than it was two, three months ago. Therefore there is less capacity for Americans to borrow and make more debt. This is the heart of why our credit crisis has gotten worse the past few months. As dependent as we've been on foreign financing of our debt, we are now facing that large of an economic restructuring. When the dust settles, we won't have as much wealth as we are used to. We won't have as much credit as we are used to. We won't have the standard of living we are used to. We will have to pay our way as we go, for the first time in about four decades. This is scary in the short-term, but will make us a better, more sustainable country in the medium- and long-terms.
In the meantime, we need to increase savings, as we are starting to do, and adapt our culutral norms to fit better with the changing facts. No longer can we find our identity, both collectively and as individuals, in excessive consumption and spending.
A very interesting sociological question is, what new cultural norms will emerge? And where in who we are now will these new norms come from? Who will we be?