COULD THE DEBT CRISIS IN THE U.S. AFFECT CANADA?

Late today there is a crisis meeting in the White House among the Congressional leaders and the President  about the debt ceiling.  By August 2, the debt ceiling must be raised or there could be a financial crisis not only in the United States but in other countries including Canada.

Here are the facts.  The U.S. government is take in $172 billion in revenues between Aug. 3 and Aug. 31, but in that period faces bills totalling $306 billion. The shortfall of $134 billion would not only force the government to choose whom to pay among its millions of debt holders, pension recipients and employees.  The sudden plunge in federal spending — equivalent to a staggering 10 per cent of U.S. gross domestic product in August –  would by all accounts pull the rug out from under the economy.

Or let’s look at this from a slightly different perspective. Suppose Congress does not raise the $14.3 trillion debt celing by August 2.  Thaqt means the U.S. treasury is unable to make a $30 billion debt payment due on Aug. 4.  Then the U.S. credit rating is cut,  and investors demand a higher interest rate to hold U.S. debt.  The government is forced to pay billions more to borrow money.  Government spending is reduced, slowing the economy.  Consumers and businesses, forced to pay higher interest  rates to borrow money, cut back.  Foreign investors flee U.S.  securities, the dollar devalues and inflation soars.  Stocks plunge amind a widespread loss of confidence.

Now there is real danger of a double-dip recession if not a depression.

The two political parties come at two different possible solutions.

The GOP wants to cut back on programs (Social secnrity and Medicare) and reduce taxes on the rich.

The Democrats want to increase taxes on the rich and save Social Security and Medicare as much as possible.

Certainly interest rates would rise in Canada and the Canadian dollar would appreciate against the U.S. dollar thus make things more difficult for our exporters.

Could the U.S. debt crisis affect Canada?

What do y ou think?

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Catharine and I are off to Prouts Neck in Maine this morning to spend two weeks with friends.  I hope to keep posting from there.  Have a great July.

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5 Comments »

  1. 1
    littlepatti Says:

    The USA is our largest trading partner. If their economy grinds to a halt, ours will also take a big hit.
    I don’t think that Congress can afford to risk it. They have to raise the ceiling, and cuts & compromises have to be made.
    I wonder if they get out of Afghanistan-what would that save? Neil? You’re the answer man.
    We are heading for Maine also. What is the allure?
    All I can say to the USA-“We’re comin’, hang in there. We’ll shop and eat NY fries”.
    Well, every bit helps!!!
    Bon Voyage. Pat

  2. 2

    Neil writes:

    The GOP wants to cut back on programs (Social secnrity and Medicare) and reduce taxes on the rich.

    The Democrats want to increase taxes on the rich and save Social Security and Medicare as much as possible.

    Actually, the GOP wants to maintain the tax bracket structure as it currently is, not reduce taxes on the rich.

    But what do we mean by “raise taxes on the rich”: (1) raise tax revenue from the rich; or (2) raise the upper tax brackets?

    Well, here’s the ironic thing: if you want to raise revenue from the rich what you need to do is lower the upper tax brackets! If you raise the upper tax brackets, you actually lower revenue.

    Obama’s own debt commission realizes this and actually recommended lowering the highest tax brackets below even what Ronald Reagan had…and, yes, they recommended doing away with a lot of tax loopholes.

    That is what I am for.

  3. 3
    Neil McKenty Says:

    Actually, Tony, The GOP want to reduce taxes on the rich because they want to maintain the Bush tax cuts.

    littlepatti:

    Sorry, I don’t know what we will save departing Afghanistan.

  4. 4

    Neil writes:

    Actually, Tony, The GOP want to reduce taxes on the rich because they want to maintain the Bush tax cuts.

    Semantics.

    Since it’s their money to begin with, and since the Bush tax cuts were from tax raises from Clinton (from lower rates under both Reagan and Bush Sr.), one can object to calling it “reducing taxes on the rich”.

    Regardless, Barry’s own debt commission is calling for rates lower than even Reagan’s lowest rates.

  5. 5
    Mike Shapiro Says:

    Every small to medium size business in Canada by now realize that their sales for 2011 will be down roughly 30%. Forget another recession. This will be a world wide depression. Even China will suffer but will come out as the world economic power in the end.


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