I think everyone is surprised by the extent of what I generally refer to as the internationalization of the dollar. People have been predicting serious consequences from America's growing government deficit and balance of payments deficit for years and they have never come. It's really staggering, for example, that America now issues the *two* most popular types of debt securities in the world and that the mortgage bond has surpassed the treasury bond in yearly issuance. The world seems completely happy to do business in dollars and save their money in dollars and dollar instruments.
I think Krugman is describing a feeling that Washington is getting - particularly Republican Washington - that the international dollar party they are throwing is not going to end for quite a while. Krugman suggests that we are really going to test the limits of how much we can actually borrow from the rest of the world. I've been looking but I don't know of an economic analysis which suggests what the upper limit might be. The rumblings that recent treasury auctions might have been too much for the system to digest have come to nothing, it seems. Could America finance a yearly deficit of a trillion dollars? More? I don't know.
Maybe Com. Doug can ask his buddy over at Grant's Interest Rate Observer.
peace,
boddi