Wednesday, August 10, 2011

Global Economy

It has become a much talked about topic about the current Global Economic Slow Down. Being a small time investor in stock market, I too am feeling the heat while I am yet to fully recover from the 2008 Satanic blow!

In this context, an article in the Deccan Herald Daily in its today's edition made an interesting reading. One Paul Krugman, whose name appears in the said Daily quite often, has written a column titled 'S&P's credibility is questionable' in the 'In Perspective' section of the Daily. America, no doubt everybody should agree, is the biggest economy in the world and naturally it has a sound influence on world economy. America is also the biggest borrower in the world as I know. If the melt down was triggered by the bankruptcy of Lehman Brothers in 2008 in America, this time on it is the down grading the rating of U.S.Debts by Standard and Poor's (S&P's) in their research report. It is this report, the author of the said article questions. Krugman makes, in all its appearance, a very concerned and deep analysis of the situation that has a very sound effect on Global Economy. He says the findings resulting in down grading of American Economy, thereby having a global effect, is based more on political compulsions of that country than the any Maths, Statistics or Economic research.

Agreed, America has done a lot of blunders by entering into wars of Iraq and Afghanistan. One cannot deny the deep dents these wars made on American economy. Yet, America is such a country which has the ability to tinker the deepest of economic dents, the author opines. I am neither a political observer nor a specialist economist. But the account on S&P's presented by Krugman is amazing.  To repeat his own words,- "To understand the furore over the decision by Standard & Poor's, the rating agency, to downgrade US Govt. debt, you have to hold in your mind two seemingly (but not actually) contradictory ideas. The first is that America is indeed no longer the stable, reliable country once it was. The second is that S&P's itself has even lower credibility; it is the last place one should turn for judgements about our nation's prospects."

Krugman goes on explaining the contradiction on which judgements are made that have serious implications on world economy. He says it is the the same S&P's who gave a one star rating to Lehman Brothers even on the day the giant financial organisation declared its bankruptcy. Also, the 2008 crisis happened because S&P's gave a AAA rating to mortgage backed assets that have since turned  into toxic waste! And this time? There was an error of $ 2 trillion S&P's calculations in making the research report and after discussions S&P conceded that it was wrong, but went on downgrading American Debts! How well he compares this to a story of a son killing his parents and then pleading for mercy as an orphan! Another point the author asks the reader to focus is that nine years ago S&P's down graded Japan, but that country not only easily gets loans in the world market but also for a cheaper rate of interest at 1%. The country never felt any economic difficulties in making good of its deficits by global borrowings all these nine years despite the rating agency not upgrading its ratings.

As regards the American ability to pull itself back to normalcy, the author opines there are at least two golden opportunities. One is Health Care expenditure in America is the highest among developed nation; bring it down, he says. And the second is tax revenue that is one of the lowest in comparison to international standards; just a nominal enhancement in this sector will boost the economy enormously, the author says. Are they, the people who matter willing to do it? Krugman opines it is actually the right wing forces that are destroying the federal structure of American system.

All said and done, now how is it going to effect this 'Great Indian Economy'?

That reminds me of a comment one of my good friends made way back in 2008. In that melee, the fellow had lost over half of his net worth in stock market, yet unfazed and jovial as ever. Sitting in Bangalore he used to call me every now and then to give me a 'hot' tip or to take one from me. "What they say this Indian economy going to be the global power," he exclaimed during one such call, "if Wall Street farts, Dalal Street purges loose motion!"

That was in 2008 about nameless microscopic flies like me and my friend swimming in the economic ocean, once again being the same in a fresh new global melt down. But Indian  economic ocean is really big and powerful , capable of absorbing the effects of gigantic scams like 2G and CWG involving astronomical figures, what do you say? Where is Lehman Brothers and Standard & Poor's?

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