[The political squabble in the United States over the federal debt ceiling has ended, but as the past few days have demonstrated, concerns about the health of the U.S. economy, the world’s biggest, have exacerbated, instead of calming down.

U.S. President Barack Obama on Tuesday signed a bill that raises the federal spending limit to as much as $16.7 trillion from the previous $14.3 billion level. The very same day, U.S. stocks took a heavy beating. The S&P 500 index tumbled 2.6 percent to below 12,000 points, shedding all gains of the year. Other stock markets followed suit the next day.

Why is it that just after a “doomsday scenario” that we’ve been hearing about has been averted, investors get engulfed in a new selling wave?

The answer partly lies in Friday’s statement from the U.S. Bureau of Economic Analysis, which estimated that the nation’s gross domestic product expanded by an annual 1.3 percent in the second quarter. However, the basis of that figure – which is no shining star either – has been eroded seriously. According to latest revisions, the U.S. economy shrunk by 0.3 percent in 2008, instead of the previously accepted “zero” growth. The contraction in 2009 was 3.5 percent, not 2.6 percent as estimated before. Throughout a long four years (2007-2010), the GDP contracted by 0.3 percent. Of particular note are the downward revisions for 2010’s last quarter (from 3.1 percent to 2.3 percent) and the first quarter of 2011 (from 1.9 percent to just 0.4 percent).

Evidently, the American economy, to which many other economies depend on, is in a much worse shape than previously thought.

Charles Dumas of Lombard Street Research calculates that the possibility of a new recession (technically, two successive quarters of contraction) next year is 50-50. Reminding that Washington will be forced to cut spending as part of the debt deal, Dumas says: “This is the fiercest fiscal deflation applied to the U.S. economy since WWII, and comes at a time of zero interest rates when the offsetting impact of monetary policy is unavailable, and of likely sluggish world trade as China irons out its inflation and Europe deflates.” (Daily Note, Aug. 2)

Evidently, the staggering $8.5 trillion of taxpayer money allocated to bail out U.S. corporations has not been the cure to America’s economic illnesses, though nearly all of those corporations returned to posting billions of dollars in quarterly profits - at a time when the ranks of the jobless continue to swell.

“The fiscal crisis is further exacerbated by the compression of tax revenues resulting from decline of the real economy,” Michel Chossudovsky says in a recent article. “Unemployed workers do not pay taxes - nor do bankrupt firms. The process is cumulative. The solution to the fiscal crisis becomes the cause of further collapse.” I think this last sentence sums up the dilemma we are witnessing.

No wonder that the almighty markets have started to demand another round of “monetary easing” from policy makers. It is only ironic that Obama made it to the White House by being the voice of the “man on the street,” but turned out to be the darling of Wall Street while he also managed to capitulate to the right-wing extremism of the Tea Party.]

This is a nice summary of what has been going on with the American economy. It is also a good complement to my weekly Daily News column, which is set to appear in a few hours. There, I note that one of the main drivers of the Central Bank of Turkey’s decision to cut the policy rate was the state of the U.S. economy. I only had a couple of sentences there to explain what is up with the Yanks, but Taylan has the full story.

A very important point he touches upon at the end of the column is how policymakers, both in the U.S. and around the world, will respond to the mess. Taylan touches upon QE3. There are those who argue that at this point, QE3 (or even 4 or 5 according to my blog host Nouriel Roubini, aka Dr. Doom), but others are arguing that because of inflationary worries, or for other reasons, further monetary easing is not likely.

Why do we care? Because what the U.S. does, and how other countries, developed and E.M.  alike will respond, will be one of the key factors that will determine if the Central Bank Turkey’s rate cut call was a wise decision after all. I will explain what I mean in the addendum to tomorrow’s column.