North Atlantic medley

There is no central theme to what I am going to write and what I want to write today about whats going on the economies of the United States and the European Union, except this: "Quis custodiet ipsos custodes?"

Now that the Standard & Poor's Company has downgraded the sovereign ratings of its home nation, the United States, to AA+ from the best possible rating of AAA, I can't help but ask this question - who guards against the guardians? Considering that these same rating agencies recklessly awarded the highest ratings to a lot of junk securities that hurt the global economy in 2008, I, as a novice in international economics and politics, want to ask how does one company (or a cabal of similar companies), have so much power in affecting the financial markets of so many sovereign nations around the world, based simply on their opinion?

Obviously, once everybody realized even the big ol USofA is not above scrutiny, all fell back on the rhetorical question asked around the world - these same people gave a AAA ratings to all those junk bonds 3 years ago right? However, at the same time, one can probably look at these agencies as just the messenger. The fact that the US and the European economies are hurting was known to all, and perhaps this rating downgrade, though it shouldn't really affect the US in the near term because there really is no other alternative to US gilts even after the downgrade, will probably bring a sense of urgency to their process of clearing up the mess, and hopefully get on some very fundamental and real reconstruction of their economies.

On a sidenote, Indian media firms can't get enough of the fact that a person of Indian origin, Deven Sharma, is the President of Standard & Poor's. But its just an aberration because most Indian readers who read the Tabloid of India or biased Congress mouthpieces like NDTV really don't care about the actual story to read into every nitty gritty of how the global economies work and the sideshows make up for juicier stories.

I suppose the 'slugfest' between governments and ratings agencies will get bigger now, considering they have dared to downgrade the global cop, with many smaller nations, developed and developing, joining in with the "that's what i've been saying!" pitch. At the same time, I really can't understand what economic mindset does the American government work in at all when their constitution actually states that the US debt will not be questioned!

Coming back to whats going on, Joseph Stiglitz continues to rip apart the western capitalist system, writing that the leaders on both sides of the Atlantic are still making huge economic blunders.

A busted bubble led to a massive Keynesian stimulus that averted a much deeper recession but that also fueled substantial budget deficits. The response—massive spending cuts—ensures that unacceptably high levels of unemployment (a vast waste of resources and an oversupply of suffering) will continue, possibly for years.

The resulting austerity will hinder Europe's growth and thus that of its most distressed economies. After all, nothing would help Greece more than robust growth in its trading partners. And low growth will hurt tax revenues, undermining the proclaimed goal of fiscal consolidation.

The European Central Bank's vehement opposition to what is essential to all capitalist economies—the restructuring of failed or insolvent entities' debt—is evidence of the continuing fragility of the Western banking system.

The ECB argued that taxpayers should pick up the entire tab for Greece's bad sovereign debt, for fear that any private-sector involvement would trigger a "credit event," which would force large payouts on credit-default swaps, possibly fueling further financial turmoil. But if that is a real fear for the ECB—if it is not merely acting on behalf of private lenders—surely it should have demanded that the banks have more capital.

And matters are little better on the other side of the Atlantic. There, the extreme right threatened to shut down the U.S. government, confirming what game theory suggests: When those who are irrationally committed to destruction if they don't get their way confront rational individuals, the former prevail.

As a result, President Barack Obama acquiesced in an unbalanced debt-reduction strategy, with no tax increases—not even for the millionaires who have done so well during the last two decades, and not even by eliminating tax giveaways to oil companies, which undermine economic efficiency and contribute to environmental degradation.

This point on prolonged high unemployment rates in these affected developed nations has been raised many times, and considering that their new aim is austerity and budget cuts, the dole to be shared with the unemployed in these nations will substantially reduce. Added to that is this adjustment to reduce excess capacities and consumption.

It is true that to stem the falling heart rates of these developed economies, a big booster is needed in the form of economic stimulus, but that has been tried before, and that only resulted in all these nations balooning their government debt. So I suppose more money can be thrown, but where will this money come from? There was talks of the US printing more money, so that will have its own consequences such as devaluing of that currency and a host of currencies around the world, and not to mention the trillions of dollars in their treasuries.

Coming back to the ratings game, I heard a good comment about what the ratings mean. That person said that these ratings are a symptom, and not a problem. Should the US and the rest of the world get too busy in providing a befitting reply to these ratings agencies, they will have lost sight of the fact that the developed economies, used to living on debt and gratuitous consumption, do need genuine reforms. Perhaps some people are smacking their lips that the US is not AAA anymore, but then what else? Absolutely nothing. The way the global economy is now entwined into the American economy, unfortunately, we will continue to share the repercussions of its mess.

Of course, as I wrote before, one big reason many people may be smiling with a bit of evil is how the mighty seem to have fallen after lecturing the world on how their economies should be run. Ha ha, as one European said, now not much difference between the "old Europe" and the US!

Back in India, the RBI has been doing its bit to increase rates in an economy where inflation is purely due to supply side constraints, but I am sure they must have put some good thought in believing that higher interest rates will somehow make vegetables and grains cheaper for the poor family which has never taken a loan in their combined lives but barely gets by.

So as much as I am critical of the way the global economy has been run by the nations facing the crisis today, I am scared at the repercussions India will face as it forces itself down on the very same path. The economic austerity and firm state oversight on the economy should stand even stronger today, but unfortunately, just when they are needed the most, the UPeeA government led by the very very selfish and self-serving people in the CONgress party, seems bent on totally toeing the neo-liberal line that the US had so far been espousing to the rest of the world.

As for Europe and the US, well, till they start making genuine changes to their lifestyle based around gratuitous consumption of resources, they will realize that it will impossible for the rest of the world and mother nature to fund it anymore. As a cousin said, if things have to go down, if institutions have to be sacrificed, let them go. Everybody knew that the socializing of private debt (the massive debts taken on by the governments), and the added fiscal stimulus would eventually return with a vengeance, and apparently, they have returned way sooner than everybody anticipated.