Will the U.S. economic downdrift bring Canadian economy down?

United States is politically deadlocked. No matter what President Obama proposes to the joint session of Congress on Thursday, most Republicans are not likely to back him.

The Tea Party segment of Republicans in the House (a significant number) is working on one item agenda only - get rid of Obama. The have made their disdain known openly for an African American President, calling him Hitler, anti American, the Other Guy and several such unfortunate names. They are hell bent on this, even if it destroys the U.S. economy, which was quite obvious during the recent debt negotiations.

This gridlock is damaging U.S. economic recovery. A large number of jobs that should have been created after the 2008/9 recession ended, have not been created. The unemployment picture is depressing as 14 million employable workers are not employed. Unemployment amongst teenagers runs at 25.4%, African Americans 16.7%, Hispanics 11.3% and whites at 8%. Many economists agree that current unemployment rate of 9.1% will come down to around 8.9% by end of year and to a low 8% in 2012, but that still leaves many million unemployed.

U.S. is Canada's largest trading partner and any serious impact on U.S.economy or buying power of its citizens will eventually filter through to the Canadian economy. While Canada's economy is still going through a slow recovery, it has been spared from a substantial impact, primarily because Canada's financial system proved to be the best in the world at a time a major financial crisis. But, if the U.S. economy continues a down drift, Canadian economy could stagnate.

It is important to insulate Canadian economy from such an eventuality. Alternative markets have to be found for its products in order to diversify exports and reduce dependence on U.S. Fortunately, Canada is a resource rich country and developing economies are in need of resources. Rising exports to China have helped offset some of the impact of declining U.S. orders.

The Canadian softwood lumber industry, which has been in a running battle with the U.S. Government and some of their intransigent politicians for years, has taken a leap forward by going to China, building houses and showing Chinese construction companies how they can build houses faster and cheaper by using lumber instead of concrete. This has resulted in creating demand for Canadian lumber in China, so much so that Canada is now exporting almost as much (if not more)lumber to China than the U.S. Other Canadian industries need to learn from this experience and explore markets around the world. The oil industry also needs to diversify its exports. An oil pipeline from Alberta to an off shore oil terminal on the Pacific Coast would make it considerably easier to export oil to China and other countries.

One good thing that has happened in this financial crisis is that Harper Government has grown up. From a reluctant, lukewarm attitude towards China in earlier years, now a more confident majority Harper Government has made progress. After a highly visible and successful visit by John Baird, Canadian Foreign Minister, Prime Minister will soon be off to China to increase trade opportunities. His recent visit to Brazil and other South American countries will also have positive impact on Canadian companies wanting to venture into those markets.

One market that Canada has not made major inroads into is India. This enormous market is very different than any other. India is not yet ready for large quantities of softwood lumber, not probably for another 10 years. Its infrastructure is abysmal and Canada could help plan and build roads on a fast track basis all over India. India is also in need of building small houses to replace slums and shanties. Canadian companies specializing in pre-fab construction could possibly set up factories in India to produce these in large quantities, so the Government and private sector, start replacing shanties on an emergency footing. There are probably countless other opportunities, for which the Indian market needs to be studied thoroughly and patiently, rewards will follow.

Canadian economy need not go down with the U.S. economy as long as it finds alternative markets and Canadian Corporations open their horizons to exploring new markets. The structure of Canadian Corporate Board also needs to be diversified to leverage enormous international talent available within Canada. The U.S. economy will ultimately recover and that could only give the Canadian economy a further boost.

US VOTERS SHOULD THROW OUT THE ENTIRE CONGRESS

A Congress that repeatedly voted funds totaling trillions of dollars for an illegal, ill planned and an ill executed war in Iraq, also voted nearly a trillion dollars for another badly managed, over extended war in Afghanistan, is now not prepared to vote for an increased debt ceiling to avoid a US default? Such a Congress deserves to be thrown out.

US voters should hold each and every Senator and House member accountable for this political debacle and elect new representatives who will be more responsible in running nation's affairs than this bunch of idiots.

Had the US Congress been sensible, it would have shut down Iraq & Afghan wars early enough to save $4 trillion. Had that been done, total US debt today would have been $10.3 trillion not $14.3 trillion. An increase in debt limit would not be needed.

The Financial Bailout and its Implications

Enough has been said already about greed, big salary and bonus payouts to senior executives of banks. The situation is where it is - precarious and needs to be addressed urgently. Treasury Secretary Henry Paulson has been running around for the last couple of weeks trying to avoid a 1929/30 style financial meltdown and all credit to him for his deft handling of the situation so far.

The current proposal before the Congress is to approve an emergency fund of $800 billion (with no apparent upper limit) to be managed by Treasury Department to buy toxic mortgages and exotic paper from banks for cash in order to provide liquidity to financial institutions. Despite the loud protests of Congress, almost everyone knows that this bill will pass and funds will be made available.

Congress may wish to place an upper limit, so this does not become an open ended commitment. Paulson himself suggested in the weekend talk show interviews that amount needed could exceed $1 trillion. This is almost equal to the amount spent on Iraq war to date. So wither plans of ending the war to save money to spend on social programs.

The Congress should also consider putting a mechanism in place that any bank benefiting from this fund will agree to freeze the salaries and bonuses of top 5% executives until such time as the treasury holds their toxic paper. Once the paper is sold, the restriction is lifted. Also, Congress should consider setting up a three member committee of reputable citizens with financial experience who will approve any bonus payments to top 5% executives of banks and financial institutions benefiting from this fund. This may seem draconian, but it is important to give a sense to tax payers that bankers will not start paying themselves huge bonuses until such time as their money is tied up in toxic assets.

The wider implications of the bailout are much greater. The national debt already ballooning out of control will exceed $11 trillion. No one knows how this will ever be paid down or how many decades it will take to bring it down to the level it was eight years ago. Treasury will probably end up printing more money and that could cause serious inflation, erosion in value of dollar and a possible shift from Dollar to Euro as the world currency. High inflation will result in high wage demands by unions, resulting in even greater inflation, mortgage foreclosures and credit card debt defaults.

I hope Paulson and Bernanke are considering all those eventualities and are ready to tackle what is to follow.