One of the standard opinions from many economists, especially those on the right, was that the US spending/debt load was unsustainable and would surely spark massive inflation. After the downgrade of US debt by Standard and Poor’s after the debt limit deal, debt was seen as toxic. America just had to deal with its debt problem or the bond market would deal with it for them. This dog simply has not barked.

The new plan to save Europe includes a condition that, says Felix Salmon, private bondholders cannot take losses on any future eurozone bail-outs. This is merely an invitation for recklessness by the bondholders, with a giant safety net put under them by Europe.

France and Germany have reached agreement on a fiscal plan for Europe that has everything to do with veto power for the European Commission over sovereign budgets and very little to do with the long-term problem of smoothing growth over 17 different countries operating under one monetary union.

We’re seeing a kind of bank run happening in Europe. The bond markets recognize that the European Central Bank is unwilling to save sovereign countries that cannot create their own money. So they’re just moving away from one country to the next, causing the cost of bond yields to rise to unsustainable levels. First it was Greece and Ireland and Portugal. Then it was Italy. Now it’s Spain.

The problem for the United States is that there’s no understanding of how much exposure US financial firms have to the expected fallout, especially if there’s a default event. JPMorgan Chase and Goldman Sachs announced their overall derivatives risk from sovereigns today, but wouldn’t pinpoint how much of that comes from Italy or Spain.

This could be the moment when the Euro union begins to collapse. Greek bonds are trading at astronomically high yields, and the yields on Italian bonds are nearing the danger zone. But bond yields for every country in the Eurozone spiked yesterday, including countries in no real fiscal danger. The bond market is in full feeding frenzy.

The hoped for respite after new leaders were picked in Italy and Greece is gone. Italian bond yields have returned to the failsafe level of 7%, and Spanish debt yields are flying up almost as fast. And now France is feeling some pressure as the Euro union is under siege.

The cost for Italy to borrow has been steadily rising and is now approaching the level at which experts believe it can’t service its debt payments. That means the Euro crisis, which could significantly affect the US, is getting worse, the previous bailouts have failed and the institutions that could save this are looking at each other not knowing what to do.

With Greece knuckling under to the European financial “troika,” the pressure is now on Italy to impose austerity on itself, just as Greece did. Italy’s borrowing costs are now much higher than Germany’s and may be unsustainable. There are calls for Italy’s Berlusconi to resign, and a confidence vote focused on the austerity package may occur soon.

With the Euro nations needing resolution of the debt crisis, we’re seeing the outlines and the magnitude of the solution they’re working towards. A huge haircut for bondholders of Greek debt, a huge recapitalization of the banks who take the hit, and enough firepower in the bailout mechanism to keep the contagion spreading to Italy, Spain, and further. They may even ask the Chinese to help.