We are living through extraordinary times in the financial markets.

As we have mentioned before, these are uncharted waters.

There are days where some of the largest bond funds in the industry cannot find liquidity from the major sell-side dealer desks.

If the largest bond funds are having trouble moving their paper, imagine the little guys.

Stocks gave up all of their morning gains to close in the red.

In the bond markets even recent new issues traded very heavy with the exception of the recent Sanofi (AA-rated pharmaceutical) 3 year bond deal and the 3M (AA-rated manufacturing company) 5 year bond deal.

High quality paper continues to out-perform on a relative basis.

The Qwest 10yr and the Newfield (NFX) 10yr bonds were each about a point lower and the new XL Capital 10 year bond was 10 basis points wider.

At a morning Capital Economics conference, there were some sobering statistics served up to players (that included some of the savvier operators in the market).

As this letter has noted before and as the conference speakers reiterated, default for Greece in some shape or form or other appears inevitable.

The ongoing debate in Europe is not about whether or not to let Greece default, but about how to handle the consequences of such a default.

The real argument is about how to spread the pain among Europe's banks ("hair-cuts") and ultimately European taxpayers.

That many European countries extended their equity market short-selling bans through November demonstrates the lack of confidence in an imminent panacea.

Ironically (and somewhat counter intuitively) the only real beneficiary of a Greek default would be Greece.

At a luncheon at the Harvard Club, the Central Bank Governor of a Gulf Arab country stated that as long as oil exports remain denominated in U.S. dollars, there could be no shift away from the U.S. dollar as a currency peg.

This one statement underlines the core essence of the Pax Americana and the recent behavior of the financial markets.

The market for U.S. Treasury bonds remains the deepest and most liquid asset market in the world.

Retaining the ability to print its own currency, the United States and the United Kingdom for that matter both retain a distinct advantage over the struggling economies of Europe.

With the Chinese economic bubble getting closer to a sharp fall, there are few viable alternatives.

It is no coincidence that private equity legend Chris Flowers (founder of JC Flowers) was on Bloomberg television this morning with a call to "buy American."

That being said, one should not be blind to the dangers of inflation.

Inflating one's way out of this economic predicament will have dire long-term consequences for the world's largest economy (Dallas Fed Chief Richard Fisher explained this eloquently in a recent speech).

The healthier (and much more preferable) outcome would be to achieve sustainable economic growth.

That is perfectly doable considering the institutional strengths of the U.S. economy: labor market flexibility, the rule of law, economic competition, and a creative education system.

While nothing is perfect, everything is about relativity and how one matches up to the competition.

Yes Virginia, there is a light at the end of the tunnel; it simply requires some serious fiscal reforms to get us there.

GDP and initial jobless claims numbers are out tomorrow.