View Full Version : US Credit Rating Downgraded

06 August 2011, 10:40 AM
The US has long enjoyed the AAA credit rating. It was downgraded today. See here (http://www.nytimes.com/2011/08/06/business/us-debt-downgraded-by-sp.html).

It is sad to see the US splutter and stutter like this, because despite her many faults, I feel US has been a force of good in the world. Yes, the US has not been clean with India at times, favouring and selling arms to Pakistan, but many Indians have benefitted from the open society of the US that allows us to get top class PhD level education from Ivy League US schools. Nearly every family I know amongst my relatives/friends has a son or daughter in the US.

I feel that in these days of globalization, where there is free movement of labour and capital across capital, there will eventually be an equilibrium in the living standards across the world. The Indian economy is improving, lifting millions from the lower class to the middle class. The other side of the coin is that the standard of living in the US will eventually have to come down. Nature has a tendency to equalize differences. I see this downgrade as a manifestation of this equalizing process.

06 August 2011, 11:46 AM
It is sad to see the US splutter and stutter like this......
I see this downgrade as a manifestation of this equalizing process....
Are you sad that this happened,
are you happy to see what you call the 'equalizing process', in play? :)

07 August 2011, 12:17 AM
Is the rise and fall of a region is cyclical.
If we take Indian region, it was known to be a golden bird and seat of knowledge.
It shifted to Greece and then the Roman Empire
British Empire was next where the sun never set.
Then came America..
Cycle is now moving to, China. An emerging Power’
I suppose,
It will be India next after China,
to complete the cycle.

07 August 2011, 01:11 AM
Are you sad that this happened,
are you happy to see what you call the 'equalizing process', in play? :)

Sad, in the sense that it is sad to see any country/nation stumble and fall. More so in the case of US that has provided an opportunity for many Indians (and others around the world) to make a better economic life.

Happy, that Indians are riding the current cycle of upward economic growth. As rkpande says, it is all a cycle and it is our turn now:D

07 August 2011, 11:16 AM
US will bounce back without any question. It has only 300 million mouths to feed, thats all (well yes, not counting the huge number of pet animals that enjoy a stress free life, still a manageable crowd though!). The inherent economic instruments that can see the land sit out and ride any storm are already in place. Just to remind ourselves, the US defense budget surpasses the collective defense budget of the rest of the world and State of California has the 10th largest GDP in the world.

Research remained the backbone of US culture and heritage, and thus it led both agricultural as well as industrial revolution in 20th century. Asian giants are now shedding their lethargy and are reshaping their own economies. And thats a good news for America, the trade blooms, life gets better uniformly for all across the globe. US is still the number one donor on the planet. Its not all gloom and doom, just another bad patch in its young life. Credit is already a bad word here now. Namaste.

07 August 2011, 12:08 PM
The news accounts of the demise of the strength of the American economy are highly exaggerated. Temporary setbacks are only 'temporary'. It is a very complex situation which most of us, as untrained economists, do not even start to comprehend. Consider the following,

1. S&P rating agency was giving a AAA rating for a host of companies when the 2008 economic meltdown occurred. They were severely criticized for being incompetent and they have to redeem themselves by going to the other extreme and putting a blot on institutions at the slightest hint of weakness. Besides, the other two credit rating agencies are fine with the AAA rating.

2. Payments/donations from commercial companies is how S&P pays its bills. So, it is not in their interest to go after them with rating downgrades. The US Govt. does not give them any money. So, by going after the Govt. with a weakened President (who is locked in a battle with the House Republicans), they cannot lose.

3. If American living standards and wages come down because of this 'equalization', the production costs in the US will also come down to what they are in the emerging economies. That will cause the production jobs to shift back to the US, which will choke off the imports. Without exports to the US, the economies of many countries, including India and China would go into a deep recession. Can you imagine what it would be like if the US started making all the steel, cars, clothing, shoes and a ton of other things that are imported right now? Economies of some of the countries might even collapse.

4. From the political point of view, the first declared priority of Republicans is to make sure that Mr. Obama does not get reelected. The best way to do that is by having a high unemployment in the US. To that end they would go so far as to cause a temporary stagnation to ensure his defeat. Make no mistake that recapturing the White House is their number one priority and all means to that end are fair game.

There are many other factors/compulsions for the credit rating agencies (who may or may not be politically neutral), to do what they do. Many 'native patriotic' people get delusional (America stumble and fall ??) and start dreaming about the rise of India as an economic giant as a result of this cyclical 'equalization' (through some divine intervention :)). If one does some research and looks at the situation with a rational mind (thande dimaag se), one finds that other nations may prosper along with the US, but not at the cost of US. If imports to the US from other nations are cut off, the lifeline to their economies will be cut off too.

I am not an economist by training; and know just enough to be dangerous. So, I could be wrong on some points. Feel free to educate yourself with facts and then take shots at my line of thinking. But common logic dictates that everything would go haywire without a center of gravity (CG). Until another center develops enough to assume that responsibility; it is, what it is. As of now, there is no other nation/currency on the horizon that even comes close to shouldering the tremendous weight of being this economic CG.

India is already a giant with the only viable spiritual philosophy in the world. It has a lot to offer to the world even without being an economic giant. The only problem for it is to protect its most prized possession - the SD - from the constant onslaught of the Abrahamic faiths. When a Hindu nation is controlled by Xitians and 'Rahul boy' is poised to run the country for the next 30 years, there is more to worry about than becoming an economic powerhouse.
PS - Aug 10
Fact 1 - Lehman Brothers (http://en.wikipedia.org/wiki/Lehman_Brothers) filed for Chapter 11 (http://en.wikipedia.org/wiki/Chapter_11) bankruptcy protection (http://en.wikipedia.org/wiki/Bankruptcy_protection) on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S. history (http://en.wikipedia.org/wiki/Chapter_11,_Title_11,_United_States_Code#Largest_cases) with Lehman holding over $600 billion in assets.
S&P had maintained a AAA rating for Lehman Brothers till the day before they filed for bankruptcy.
They specialized in rating various Bonds, now they have come out and started to evaluate the overall US economy for which they are ill equipped.

Fact 2 - On Aug 8 2011, the day after the rating change, the stock market went down and money flowed out of it. Where did it go to? To the US treasury bills, the very thing that had been downgraded. Even after the downgrade, the high powered professional money managers still considered the US treasury to be the safest place to park their money at. What a joke!

Fact 3 - S&P had made a 2 trillion (that is trillion with a T) dollar mistake in their computations for the downgrade assessment. When confronted with that, they acknowledged their mistake, but the damage was already done. What a monstrous mistake - $2,000,000,000,000. Now that is what I call a totally inept company.

Update on Aug 18 2011:

Update on Aug 22 2011:
NEW YORK (AP) -- The president of Standard & Poor's is stepping down, an announcement coming only weeks after the rating agency's unprecedented move to strip the United States of its AAA credit rating.
The McGraw-Hill Cos., the parent of S&P, said late Monday that Deven Sharma will be replaced by Douglas Peterson, now the chief operating officer of Citibank N.A., Citigroup Inc.'s chief banking arm.


07 August 2011, 03:16 PM
hariḥ oṁ


This down grade is like a student receiving an A+ on a term paper... then the paper is reviewed and after further review the student is given only an A. That is like taking an AAA rating to AA+.
There are 2 more agencies Moody’s and Fitch , and they are keeping their AAA rating for the USA. So , what does this say?
It says the S&P is firing a shot of warning. It is saying we're watching, get your house in order. Both Moody’s and Fitch have a wait and see approach, that could in fact erode over the next few months. Next check period is November.

IMHO the down grade, if it went from AAA to say a B rating, you would have the administration's undivided attention. What is missing to keep a AAA rating? In my estimation 4 things:
1. A Congress that can work for the common good ( today I rate them at C-).
2. A growing economy or GDP - the USA is sluggish (1.3% annualized) and has been for some time.
3. The ability to curb one's debt - today the USA is on the hook for $14 trillion dollars. In anyone's book that number is beyond huge. This is spending beyond one's means... I ask you, can you do this at home? Perhaps so, but for how long until the debt crumbles your way of life.
4. The ability to curb one's debt is to manage all of the programs that the government is managing - I am of the opinion there is too much government at the Federal level and more should be managed by the states.


07 August 2011, 07:50 PM

Credit is already a bad word here now. Namaste.

You mean I won't be able to get any credit anymore to finance my mercedes ML 500 that I can't afford? darn it... :)

Eastern Mind
07 August 2011, 10:34 PM

You mean I won't be able to get any credit anymore to finance my mercedes ML 500 that I can't afford? darn it... :)

Vannakkam: Sorry, buddy, you'll just have to stick to punya earned from running these forums and putting up with we nutcases. Punya is the kind of credit that's a lot safer than money anyway.

So was the Mercedes just going to be an upgrade from your existing Mercedes?

I still ride a horse. Price of oats is still low. But he's good revenge on the neighbour. His pleasant rear end odor beats the barbecue smoke from over the fence.

Aum Namasivaya

08 August 2011, 09:12 PM

I still ride a horse. Price of oats is still low. But he's good revenge on the neighbour. His pleasant rear end odor beats the barbecue smoke from over the fence.

Aum Namasivaya
hahaha...now my wife is wondering what's gone wrong with me. laughing at the laptop again!