If you pop into a toilet on the Seattle waterfront this summer, you might see over-flowing bins. The reason? A polite notice explains that "because of 2010 budget reductions", the Seattle government can no longer afford to "service this comfort station" each day. Hence the dirt.

Investors would do well to take note. In recent months, America's fiscal mess has assumed a rather surreal air. On paper, the country's federal-level deficit and debt numbers certainly look very scary. But in practical terms, the impact of those ever-swelling zeroes still seems distinctly abstract.

After all, so far the federal government has not been cutting spending; on the contrary, there was a stimulus bill last year. And, as my colleague John Plender pointed out this week, Treasury bond yields have been falling, as investors flee the eurozone woes. As a result, those scary numbers still seem to be problems primarily concocted in the world of cyber finance.

But there is one place where reality is already starting to bite in America - and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.

Last year, that pain was partly eased by Obama's stimulus package(s). But that spending splurge is now fading away. And in fiscal 2011 and 2012, the states are expected to face another combined budget deficit of $260bn, with the 2011 shortfall in places such as New Jersey, Illinois, Nevada and Arizona projected to be more than 35 per cent of last year's budget.

So far the municipal bond market has been dangerously complacent about all this, with yields on 10-year municipal bonds hovering slightly above 3 per cent. But, even if markets seem relatively relaxed, the key point is that the state statistics are already having a very real world impact - in contrast to the federal debt.

Never mind the trivial matter of Seattle's "comfort stations"; as it happens, Washington state's finances are better than most. In New Jersey schools, classes are being cut. In California, public sector employees are not getting paid. In New York, a subway extension has just been cancelled. And in places such as Illinois and San Diego, pension benefits are being renegotiated altogether, breaking numerous taboos.

David Fuller's view I think the markets are complacent about US debt problems, primarily because of the haven states. In markets, relative safety and value are often in the eye of the beholder, who will also be heavily influenced by short-term trends. However perceptions inevitably change and the process can be rapid as we saw with the euro and Southern European sovereign debt. Savvy investors are always pondering the question: "Who's next?"