In August, Standard & Poor's downgraded U.S. Treasury debt, judging our political system broken enough to create some miniscule risk of default, whereas their previous rating judged our political system a smidgen competent enough to likely avoid a miniscule risk of default.

Bondholders knew that S&P was all wet and bid up the prices of Treasuries so long as stocks looked risky.  That's what happens when you're a sovereign that controls your own currency and controls a currency that the world uses as it's reserve.

One of the many things that made no sense about the S&P downgrade was this: how can France and Germany, both countries with debt-to-GDP ratios north of 85%, be AAA when the U.S. was not?  The U.S. controls its own currency.  It can always print the dollars to pay its debts.  That might cause inflation, yes, but a bond only entitles you to dollars, not to inflation-proof dollars (Treasury Inflation Protected Securities being a notable exception).  The bargain behind a Treasury is this -- you will get your principal plus promised interest, in dollars.  What those dollars are worth when you get them is the risk you're taking (it's one of the reasons you get interest in the first place).

The deal with a French or German bond is much the same.  You will get your principal and interest in euros.  But, here's the thing... France and Germany do not control the number of euros available to the world at any given time.  They have influence, but not control.  If their debts come due and there are not enough euros to pay them, Germany and France can't do anything about it.

Solvency is about getting what you'te promised.  If I borrow two bricks of gold from you for five years, your are entitled to two bricks of gold when the debt comes due.  If gold is $3,000 an ounce when I give your bars back, you're happy.  If it's $200 an ounce, I am.  But either way, the debt is paid when the bars are returned.  Doesn't matter what they're worth.

It strikes me as odd that S&P felt comfortable downgrading the U.S., which can always provide dollars for its debts, months before downgrading France, and without downgrading Germany.  Today's market movement is proof of irrationality in the system, at the highest levels.