- U.S DOWNGRADE--THE ROAD AHEAD
Is the U.S sliding into double digit recession?With S&P's downgrade of U.S rating from AAA to AA+(the first downgrade since 1917),serious doubts are being expressed about the country's creditworthiness and financial strength to withstand the mounting debt burden.Challenging the basic preinciple that one cannot spend what one does not have,USA has been splurging extravagantly and wastefully on borrowed funds for many years.How long can a country shine on borrowed feathers/The D DAY of reckoning has come for that country and several suggestions,as follows, have been made by bloggers,credit and investment analysts,economists,contributors on websites like MSN news,Yahoo news etc., for USA to tide over the creisis.Quo Vadis Uncle Sam?
1. There should be a moratorium on bank lending by banks in USA,for a period of two years,commencing from 1st September 2011,during which period,they will concentrate on recovery of all irregular loans and reckless advances made by them
2. All credit cards issued to customers in USA by banks and other institutions should be cancelled for future credits,for two years from 1st January 2012 and recoveries of outstanding amounts should be completed within a period of two years from1st January 2012.
3. Salaries for all those employed in U.S Government,banks,financial institutions,companies,corporates,business establishments etc.,, must be reduced upto 50% from the present levels gradually over a period of say, two to three years,so that U.S citizens will learn to live within their means and not on borrowed funds.
4. U.S.must drastically cut down its expenditure on defence,by withdrawing its forces from Iraq,Afghanistan and other countries.
5. U.S.Government must immediately enforce austerity measures in all its establishments,to curtail expenditure by a minimumof 25%.
The above suggestions may look very difficult for implementation,but serious diseases need surgery for cure.The mess in which U.S.is finding itself now is the cumulative result of years of reckless economic policies and mindless splurging of borrowed funds. A nation.like an individual, cannot live indefinitely on borrowed funds. When the tables turn,the consequences may spit volcanic lava,submerging all its past glory.The day of reckoning has come for them and the bell tolls for Uncle Sam.Will he listen?
Best regards. - Sampath.
Moneycontrol.com - News
Finally, the eventuality that we have been arguing for a long time has manifested. Yes, the world's largest creditor, the United States of America, has lost its top credit rating for the first time in the last 70 years. Standard & Poor's (S&P) has downgraded long term US debt from AAA to AA+. The credit ratings agency asserted a negative outlook on long term US debt. It even warned of a further downgrade in the rating within the next 2 years if the US government's debt burdengrows higher than that assumed by S&P.
You may ask how exactly a credit rating matters. In simple words, a credit rating gives the investor an idea about the creditworthiness of the debtor and the risk of default. If a bond has a low credit rating, it means there is more risk. Now, wouldn't you want a higher interest payment for assuming greater risk? Yes, of course! In fact, the impact of the downgrade would be much more severe if the other two large rating agencies such as Moody's Investor Service and Fitch Ratings also follow suit. It would force the US to raise interest rates and thus raise the cost of borrowing for everything.
This could send a panic wave across the world financial markets which in turn could cause a liquidity squeeze in the Indian stock markets. But is any of that going to change the economic fundamentals of our economy? We believe there will not be much real impact on India, unlike China which is the biggest creditor of the US. As far as stocks are concerned, we believe sticking to our value investing approach would help us sail through any kind of crisis.
Looking at the big picture, we are in the midst of a major shift in the world economic order. The economic supercycle that led the US to become the economic and political powerhouse in the 20th century is clearly turning. The gravity of power is shifting, albeit gradually, to emerging economies. The change will be full of shocks and upheaval. But the good news is that we are perfectly placed in the land of a billion opportunities.
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