There is a dangerous complacency regarding this economic crisis. Many believe we have seen the worst and are back to business as usual. The stock market has made a miraculous recovery. Some say it is off to the races once again.

This crisis is not over. It has barely begun.

Watch the currency and debt markets. They are apt to signal when and where this crisis surfaces next.

Europe has a serious problem with Greece. Some have suggested that their problems are so severe that the EU may break up over this and other sovereign financial issues (think also Portugal, Spain and Ireland). If a break-up occurs, it is unlikely that the Euro continues to exist. More likely is a return to individual currencies.

This risk should put downward pressures on the Euro and Euro debt. Yet, as reported in theWall Street Journal:

Something troubling has occurred in the market for default protection on the debt of the world’s biggest borrower.

As the folks at Standard Poor’s Valuation and Risk Strategies division noted in a research note Monday, the difference between the spread on U.S. sovereign credit default swaps and an equivalent benchmark for AAA-rated euro-zone sovereigns flipped into positive territory March 12. As U.S. CDS spreads expanded to their widest levels in two years, that cross-region gap blew out to 5.7 basis points last Friday before narrowing to 4.7 Tuesday.

Wider CDS spreads indicate that sellers of insurance against a particular issuer’s default are charging more for it. In effect, the positive U.S.-versus-euro zone spread means investors think the risk of a U.S. default–however remote–is greater than that on euro-denominated sovereign debt.

As if this signal were not enough, a separate piece in the Wall Street Journal that same day spoke about the weaknesses in Treasury auctions:

It was an “ugly auction,” said Ward McCarthy, managing director of the fixed-income division at Jefferies & Co. “You’re starting to see a bit of a Treasury market protest. There’s a very legitimate concern that Washington is pushing the envelope too far in terms of the U.S.’s ability to carry all this debt.”

Furthermore, David Rosenberg expressed his concern in his March 29 post:

Last week’s bond auctions did not go well. It seems that Japan and China did not show much interest. The lack of bids was no better underscored than in the 7-year Treasury note auction where the median yield was 3.29% versus 3.05% a month earlier. April is a cruel month for the U.S. Treasury market, with 10-year yields rising in each of the past 4 Aprils and in 6 of the past 7, and by an average of 25 basis points. (As Alan Greenspan said on Bloomberg News last week, higher yields are “the canary in the mine”.)

These are danger signals for the US and the world. The US (and European) welfare states are unsustainable. Markets are going to destroy them. Are these the first cracks starting to appear?

This economic mess is not over. It has barely begun. The Fat Lady has not left the building. She is resting. She knows she will be singing soon and long.