Today seems to be the day that the crisis in Japan really slams markets. The Nikkei is down 10% (almost 20% from pre-earthquake levels), while exchanges elsewhere are suffering sizeable drops. As of this writing, our three major indices have lost over 1.5% of their value since opening this morning--not catastrophic, but still rather painful.

Meanwhile, we're experiencing another round of flight-to-quality, with yields on US treasuries falling to their lowest level this year, meaning that we can now borrow even more cheaply than we were. Bloomberg features a rather grim quote from Ray Remy of Daiwa Capital Markets: "It's the fear of the unknown. Most people think that when there's a natural disaster, the economy will dip for a period and then come roaring back as they rebuild. The events playing out in Japan could be much different."

Periodically, you hear students of the Great Depression wondering whether another shoe is going to drop, the way it did with Austria's Creditanstalt in 1931. The economy looked as if it was going to recover from a sharp, but not all that unusual recession--and then Creditanstalt failed and everythingwent to hell. Unfortunately, we have a lot of candidates for the next disaster: oil disruptions in the Middle East, the European debt crisis, and now Japan.

For Americans, the added worry is that this "flight to safety" may be sending bad price signals to key decision-makers in the US. Tyler Cowen writes

It's hard to argue that we should become more willing to borrow because Japan had an earthquake that will cut into global GDP. Yet functionally, this is the argument that people are making, when they say that our current deficits must be okay because the markets are willing to lend us the money at cheap prices. All the developed countries (i.e., the ones that can be relied upon to have the will and the means to attempt full repayment of their debts) have huge, glaring economic problems; ours are probably the least bad. But that doesn't mean that we can't and won't have a fiscal crisis if we borrow too much.

And the bad signals aren't just to the federal debt market--the flight to quality is ultimately going to push things like mortgage rates down too. Would the people urging the government to take on as much debt as possible also urge our homeowners to once again leverage themselves as far as the banks will allow?

Update (12:25 pm) Reader abUWS has perhaps the best, most succinct metaphor I've ever seen for this argument:

"When the Titanic was sinking everyone eventually rushed to the stern of the ship. That didn't mean that that part of the ship was actually safe."