Saturday, August 20, 2011

USAAA To USAA+

Another mail from Saravana Kumar to go global - asking, "Why don't we discuss about USA's downgrading from AAA to AA+ this time?". Yes. Why not? Here you go...

As usual, let's start from the basics and stop where we feel tired and exhausted. Before that let's see my connection with economics. In school days, I always used to enjoy the company of my seniors. I had a senior friend by name Sadak Abdullah in our street, who was many years elder to me. Many years? Ambiguous! How many years? Be specific. OK. 5 Years. When I was in my seventh standard, he was in his 12th standard. I was mostly 2nd in the class from third standard to eighth standard. It was not one person who came first in all six classes. I always ensured the competition was only for first rank, not the second. So, I would be the second one to get seat in first group (MPCB - Maths, Physics, Chemistry and Biology) when I go to higher secondary. But, Sadak was studying in third group (HEPG - History, Economics, Political Science and Geography). This group was called fourth group in some nearby towns where MECA (Maths, Economics, Commerce and Accountancy) group was called the third group. In this case, third group is called Commerce group and fourth group is called Arts group.

Sadak taught me two things very early in my childhood (I consider seventh standard also as childhood now though I wouldn't have agreed to it then!). One - "You should never mug-up your lessons; study only what you understand and leave the rest; the message is important not the marks!". He also used to show me how to 'understand and study' when he studies. I never forgot this lesson until I wrote my last paper in college. Second - "Arts is much more important and valuable to the mankind than Science!". I used to argue with my friends on this almost till I joined my higher secondary. I am not so convinced now but I do think that Arts is not given the amount of importance it deserves. When I say Arts, I don't mean drawing pictures or any other art form; It's the Arts subjects like HEPG (History, Economics, Political Science and Geography).

So, in my arguments, I used to give philosophies like - "Science will take you ahead but only Arts can teach you about your past without which we would be advanced human beings with no values", etc. I think it's still true. The societies that do not know history will end-up wasting their time in repeating the same mistakes, right? So, I wanted to join the third group even if I came first in my tenth standard. It was revolutionary thinking at that time! Luckily, common sense saved me at the right time. I took the road more traveled. Maybe I might have become bigger than this but it wouldn't have been a smooth sailing. Though I joined first group in my higher secondary school, my love for the Arts subjects never died. Even at that time, I used to discuss a lot about their subjects with Arts students.

What can a Science student become at the max? Scientist! But, what can an Arts student become at the max? Finance Minister! Who is bigger? Finance Minister! Only later did I realize that a Scientist can also become a President of the nation. Who is bigger - Finance Minister or President? No idea! So, somewhere in a corner of my mind I was dreaming that I would become the Finance Minister of India before becoming the Prime Minister. To make matters worse, someone from our region became the Finance Minister (Chidambaram... He was a very honest politician at that time!) in Deve Gowda's cabinet (I don't know how honest Deve Gowda was at that time!). So, I was calculating the distance between his native place and mine, and counting the number of Finance Ministers that will come and go between him and me. That dream chased me after History books and Economics books.

Even when I was in college studying Computer Science, I used to borrow Economics books from friends and try to read. Please note - Only trying... no doing! After all the rigorous trying, I never understood anything other than these two terms - Macro Economics and Micro Economics. And, I also understood that I need not understand Micro Economics to become Finance Minister. It was very late when I understood the real secret - 'You don't have to understand anything to become a Finance Minister. The bureaucrats will understand you. That's enough!'. So, that's the introduction about my connection with Economics. Heck... already so many paragraphs! Let's jump into the subject now...

AAA to AA+? What's this ABC business in Economics? It's called Bond Credit Rating. What is that? It's a rating given to indicate a country or corporation's credit worthiness. What is credit worthiness? It's nothing but the ability of someone to payback loans. For individuals, we have credit cards in different designs, right? Titanium card, Platinum card, Gold card, Silver card, etc. It's just like that. If you are a General Manager earning more than 20 Lakhs per year, you will be given a Titanium card. If you are a Senior Manager earning more than 15 Lakhs per year, you will be given a Platinum card. If you are just a Project Manager earning more than 10 Lakhs, then Gold card. Others earning less than 10 Lakhs may get Silver card. These are assigned by many agencies like many banks in our case. Moody's, Standard & Poor's (S&P) and Fitch are some agencies who do this. Starting from AAA, AA+, AA, AA-, A+, A, A-, they go on till D. Here '-' doesn' t mean negative. They are the lowest in that letter combination. That's it. So, AA- is better than A+. AAA is called Prime and D is called Defaulter. Even B and C series are not considered good. This combination standard is slightly different from agency to agency.

US has always been AAA in all the above three agencies' rating throughout despite all recessions the global economy faced from the day this rating system started. Of the three, S&P has downgraded US to AA+ and also warned that it might even become AA in the long term, though Moody's and Fitch have not done that. Moody's is still rating US high but Fitch has told, "We have not concluded our review yet!". This may mean that they may also downgrade. While giving this rating, S&P has also scolded US saying, "You are less stable, less effective and less predictable!". In our language, what does it mean? "Hey, friends... relatives... neighbors... Don't believe this guy as much as you have been doing so far. Don't give him too much money. You can't take it back. Don't pay the same amount that they quote if you are buying anything from them. They are not worth it. Even if you ask for half the price, they would come down. Be smart!". They also say that these guys have no concrete plan to counter this problem in visible future.

OK. Why did it happen? Because, they have been having deficit budget year after year. It's not new for someone like us. But, for US? No. It can't happen. They are the largest economy in the world. They are the top most super power. Why did they have deficit budgets year after year? They spent more than their worth. Where did they spend all the money? In wars, in producing weapons, in many unwanted things! Were their wars unwanted? Were they really inevitable? That is the million dollar question. I am not sure. But, my two cents of knowledge says at least the Iraq war could have been avoided. Not sure what you think.

What would happen now? The simplest thing that comes to my mind is another recession. In economics, boom and doom have become like full moon and no moon now. Even then most people don't realize the value of savings. They celebrate in booms and calibrate in dooms. All we need is a conservative thinking and behavior in financial matters. Be patient. Don't throw money like peanuts. You shouldn't even throw peanuts when there is no need. I mean the need to throw, not the need with peanuts! Other countries that have invested heavily in US markets will start taking their money out if the panic gains momentum. US will have to spend a lot of time lobbying and convincing them.

What would happen to their citizens? They will have to pay higher interests for everything and may even have to pay more taxes. Prices of all their assets would go down. You can't sell a house for the same price that you bought for. It will be much lower. Even then there won't be anyone to buy. US dollar would depreciate against other currencies. So, some of our cousins drinking chilled bear in the land of opportunities also would feel the heat. But, at the end of day, there will be a lot of corrections is what experts say. How far is the end of day? I don't know. Those experts might know. No bank can go to the government for help now if they are bankrupt. Why? The government would say, "You bloody fool, I am myself in trouble and in need of someone to bail me out. You are asking me!!!".

Do you know how Obama responded to this? He said, "Irrespective of whatever any agency calls, we are United States of America and we are always AAA!". Looks like he has forgotten the short form of United States of America. Mr. Obama, You are always USA, not AAA. Have we not heard this kind of speeches enough? Even our Lalu speaks like this. Will it impact his second term presidential aspirations? Most likely! There was so much hope when he took over. He was even honored with Nobel prize. Everything looked so rosy. And, today it has all become thorny. Unfortunately, it has had such a tragic end now. Is it all his problem? May not be. But, he is responsible. They may need their Manmohan Singh (I mean, a strong economist!) to head their government now. But, they shouldn't end-up having our problems as a by-product. :)

What lesson does this have for other countries? Not just for countries... It has a very good lesson for individuals as well. If you can't pay back, don't take too much loans. Building new houses for living, buying new cars for transportation, buying weapons for safety, going weekend shopping for more comfort, spending in pleasureful activities for fun, taking loans for time pass... all can wait. If you spend more than what you can afford, you would be called a defaulter and you will have no one to support you in the end. Don't call all your wants needs. Be conscious of every penny that is spent from your pocket or credit card. Otherwise, you will end-up having no pocket and no credit card.

Are these all exaggerated statements? Maybe. If they have proper policies and cost-cutting measures in place, they may be able to bounce back. But, even their own experts are saying, "It's possible, but not in near future!". Some even say that getting back AAA may take time but handling the panic and immediate problems are easier. It's more of a prestige problem than anything else because there are more than a hundred countries that still fare worse than them. And, more importantly, life still goes on for all of them. They can take some tips from us, too. Please go to the end of the article to see how we fare. :)

How will it impact India? Some people say that it would have some impact because we are piggybacking too much on them. It's true that we have become the first nephew of Uncle Sam in recent times. Others say that ours is a resilient economy and nobody's recession would affect us so much as it does other nations. As usual, I am confused on this! It would be great if a smarter soul explains this in our language, i.e. layman's language in the Comments section - without any political bias. So, the story ends here.

As package offer, let's look at who else is still AAA. The trustworthy... sorry... credit worthy guys (Saying both are same?!)... There are still 16 nations. Including a small boy called Isle of Man (I haven't heard of this name before!). The remaining 15? France, Germany, Norway, Sweden, Switzerland, United Kingdom, Singapore, Australia, Austria, Canada, Denmark, Finland, Luxembourg, Netherlands, and New Zealand. Different lists give different names. So, I am not sure! The second largest economy China is AA-.

By the way, where is India on these lists? BBB-. Not bad! :)

4 comments:

  1. that cleared some of my doubts over the jargons :)

    ReplyDelete
  2. Oh, that's cool. Thanks Sub.

    Hope it doesn't mean it did nothing else... ;)

    ReplyDelete
  3. Hmmm.. That was a good enlightening article about the economics and your ergonomics on the subject..
    I am sure I am going to forget this soon. :D

    ReplyDelete
  4. Ha ha ha... Economics and Ergonomics... Thanks Sahana.

    What are you going to forget? The article or the lesson that USA has taught us? :)

    ReplyDelete

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