We see this in South Africa with a currency that continues to strengthen against the USD, rising gold and oil prices. Hot or speculative money enters the country to buy resources as a hedge against inflation with increasing commodity prices When food prices start to increase the problems will start to boil.
The authorities are worried as the "recovery" appears to be jobless.
@ Shmuel, Your hypothesis is supported in this week's New York Times - Dec 4, 2010 [http://www.nytimes.com/2010/12/05/us/politics/05states.html?_r=1&am... Fears of a Crisis].
while that article is very interesting, it in a also rather typical of the American mindset: It pretends that the USA is a self-supporting "island". This ignores the issue I mentioned completely.
If a number of states or cities start defaulting on their loans,
1) what will this do to the dollar in the international market - it will start falling even faster.
2) With the dollar much devaluated, WHO would be crazy enough to lend the USA even MORE money, and against what sureties??
3) The USA depends on imports for MANY crucial needs. With the dollar in the crapper, how will the USA deal with it's extreme trade deficit? You can't buy much more than you sell, if your currency is tanked...