Are we ready for another Uncle Sam?

Introduction

For those of you who missed yesterday’s session on “US crisis and India”, you need to have a MasterCard to experience it again. For long now, one always expects Uncle Sam  getting called a bad relative and those who go there; study and settle down will eventually feel the pinch. But, to hear it from an experienced person like Dr. Vinayak Govilkar on this was mesmerizing.

I think I have done enough to build up the case; I have surely done my part in making those who missed the session, feel guilty. These were things that we all knew. Before getting to the genesis of this whole USA business, let us get our facts right. USA’s current deficit is $14.398 trillion and it has to pay $500 million as interest every day. This debt sharing works out to $121957 per family. No one knows how USA has benchmarked the meaning for a family. 

Hail Uncle Sam

USA has a Debt Ceiling Act through which it can increase its debt cap by passing it in the Congress. Earlier the debt cap was raised to $14 trillion. Since, it has been breached, US is in a mood to increase it by another $3 trillion. The justification of this rise is given by the fact that they can pay back $2.4 trillion of that money, if they raise $3 trillion. It’s like, 6 pegs of Vodka have already gone in and one is on the brink of passing out. Yet, one still wants to drink more. Thus he borrows money and drinks some more and forgets about returning the money when he comes back to his normal sober-self. Guys, get out of the Hangover2 soon!

Before stacking up all blame on USA, let us get back to history on how USA became such a powerful country. Founded in 1776, a group of docile people pushed out the aborigine Indians and made it a Centre of Excellence. Years passed. After the First World War, a standard for money exchange became the need of the hour. Many companies came up with Gold as an answer, while USA went a step further and fixated a value for Gold in terms of dollars - $35 per ounce of Gold. Things spread slowly and international trade began to be done in Dollars. No one questioned the reason on why it had to be done so, because they equated gold to dollars. And no one questioned them the rationale behind the quantification. Why didn’t anyone question, was simple enough.

Games they play

Every World Bank President till date has been an American and USA has 17% quota in its Senate. And the minimum vote share required is 85% for any loan to be approved. Why would anyone go against the US, questioning their rationale? Dollars out of US (World Bank, IMF) flow into other countries, while other countries buy U.S Treasury Bonds (US’s euphemism for loans), US dollar starts to fall, while other countries try to protect the dollar. What is US doing?

In 1971, our Watergate hero Richard Nixon came out with a brilliant idea that the dollar will divorce gold. What he meant was that, the dollar was just a currency from thereon with no value to back it up - Simple paper, worse than a Zimbabwean Rand. One incident after another, USA started feeling the pinch. S&P downgraded it from AAA to AA+ (Let us not laugh, we are a bloody BBB-). And the reasons for their rational behavior are as follows:

1.   1. Unemployment rate was at 9.2%. Approximately 14 million people were unemployed which meant that the government had to spend on Social Security, a concept unheard of in India.

2.  2. Long wars in Iraq and Afghanistan, which meant that they had to spend on military expenditure. Is this the reason why their presence in Libya is very limited?

3.   3. Expenditure on medicare.

4.  4. With an IQ of 125 (91 is a false news), George W Bush came up with beneficial tax cuts in 2001 and 2003. The years being specific because, in those respective years they went on wars with Afghanistan and Iraq.

5.     Because of all these expenditures, USA is not able to invest in its physical and intellectual infrastructure which is hurting them a lot.

The current US deficit is around $1.3 trillion and everyone is watching on how the situation could improve. The dollar cycle will go on until the world perceives that the dollar has no value and a day will come when someone can take advantage of it. Who would it be?

How is India in a position to take advantage?

We are at 14^th position in terms of exposure to US debt – $41 billion, while our close friend China tops the chart with $1.5 trillion. But the Indian culture of consumption for satisfying needs than for luxury has insulated us very well. We are very protected by our economic culture of spending today’s income for tomorrow’s expense. There are a few countries like PIIGS (Portugal, Ireland, Italy, Greece and Spain) who are caught in the deficit spiral of spending tomorrow’s money, today. Greece actually pledged their “Toll revenue” to get financial aid and the rest became history.

India has some positives to look for, such as the decline in oil prices once the dollar depreciates, which will decrease the interest rates; increase in FIIs, etc. While there are a few negatives which include, slowdown in FDI, pressure on Rupee to appreciate in turn affecting domestic markets as imports become cheaper, exports taking a blow due to dollar depreciation, we are, still, there to take advantage of the situation. But how? With fasts and incapable governments?

We are here to see a promising future when things outside are in a turmoil. There are few countries in the world which can actually turn things around. India being one among them can seize the situation and turn it around completely, if she wishes to!!

(With inputs from Anoop Sherlekar)