This could also reflect a lack of faith in other governments rather than faith in the US government. If assorted European debt became 10x more risky but US debt only became 5x more risky, that would cause a flight into US debt.
One of the more interesting reactions to the FOMC’s gloomy appraisal of the economic state of affairs is the surge of strength into the dollar and the corresponding tumble in the euro. The U.S. dollar index — which is heavily weighted to the euro — is up 1.8%. The euro is down against the buck to the tune of 2.1%, a giant move in the forex markets.
http://blogs.wsj.com/marketbeat/2010/08/11/oh-man-not-europe...
Said the captain of the titanic.
It would actually be a good sign at this point if investors lost interest in buying government debt (from the US or from other governments). Because then they would find something else to invest in... like maybe something that promised some gain, something that would put people to work and make use of idle capacity. The fact that everyone is anxious to hoard cash or cash equivalents, even at miserable interest rates, is an ominous sign: When deflation comes, hoarding cash for as long as you can is a paying proposition, and the economy spirals to a halt as everyone tries to wait through as much deflation as possible before buying anything.