In order to approve the bailout plan, Congress had to raise the debt ceiling for a second time this year to a whopping $11.3 trillion. If the United States actually does hit the $11.3 trillion mark, debt will then make up more than 70% of that nation’s gross domestic product (GDP).
Meanwhile the 2008 Q3 GDP results indicate that US GDP is shrinking by 1% annually (0.3% negative change from Q2 to Q3 x 4 = 1.2%). The Canadian GDP is also shrinking at the same rate but federal government debt is only 48% of GDP.
The situation underpinning the US GDP is not very good as these Q3 / Q2 comparisons indicate that Americans have significantly reduced investments in their own economy:
Consumer spending -3%
Residential investment -19%
Fixed investment – 1%
Business equipment -5%
Inventory levels -38%
The high USD is also killing American exports to the tune of -350% per quarter! This is not good for the job situation in the US which in turn will fuel continued deterioration in consumer & residential spending.
Is this just due to a temporary blip in US banking credit? No. In fact the non-borrowed reserves underpinning the entire US banking industry is negative and the situation has been getting worse each month since 2007.
In other words, the US banking industry is completely bankrupt and in aggregate is entirely propped up by borrowing from Federal Reserve (which in turn is financed by US government debt).
Is Canada in any better shape? With 80% of our GDP tied to the USA, the Canadian economy is just a lifeboat still tied to the deck of the Titanic by a very long rope. It is no coincidence that Canada is urgently exploring a free trade agreement with the EU.