Downgrading the US will change nothing!
The unthinkable has occurred. And at the hands of the unflappable Jharkhand (India)-born president of the firm, to boot. Standard & Poor's has downgraded the US to AA+ from AAA, a grading it has enjoyed for 70 years.
The US now trails behind a dozen countries, including Liechtenstein, a name that is apt to make India's black money account holders sit up and take note.
The S&P has based the downgrade on “a negative outlook”, meaning that it will take a long time before the triple A status is restored.
Actually, S&P was not the first to get into the act. Egan-Jones, a firm, though not yet a well-known brand, recognized by the US Security Exchange Commission, had also lowered the rating to AA+ less than a month ago. But no one noticed it.
Is there any chance that this will change something inside or outside the US? Zilch! The US President, Mr Barack Obama, has ignored the downgrade.
It was left to a junior official of the US Treasury to point out the monumental error of $2 trillion made by S&P in its calculation, on which it formed its judgment and based its announcement.
The dollar will sail merrily on as before, having everybody in its hypnotic hold.
As per available research data, foreigners today own a record high of 46 per cent of US Treasury Bills, as against just 1 per cent in 1945. This will continue.
All talk of international supervision over the printing of the US dollar and adoption of a new, stable and secure global reserve currency, mainly advocated by China, will end up being so much hot air.
India is taking the event in its stride. It is no surprise. The downgrading of the US poses no danger to any of the deals and other tie-ups between India and the US. There is even some eagerness over the prospect of the attention of foreign investors turning to India because of the downgrade.
India's thriving community of fiscal and monetary professionals and business and industry magnates has shown itself capable of independent analysis and action without running after imported solutions.
Further, India's economic profile bears no comparison with any other country's, in respect of challenges and demands.
These were the major reasons why neither the South Asian meltdown, nor the 2008 financial crisis has had any effect on its economy.
Of course, the downgrade has come as handy grist to the domestic political mill in the US and to sensation-seekers around the globe — hence the nonsense that is being heard of the US itself going down the chute.
The US is like a cat, in having nine lives and landing on its feet, however hard the fall.
My real quarrel is with S&P (and rating agencies in general). It says the downgrade “reflects our opinion that the fiscal consolidation plan, that Congress and the administration recently agreed to, falls short of what….would be necessary to stabilise the government's medium-term debt dynamics.”
It also calls into question the “effectiveness, stability, and predictability” of US policy-making and political institutions.
What competence do rating agencies have, to make such catch-all pronouncements?
Is it wise to let them get away with claiming a disproportionately dominating role, which makes them, as a document circulated at a global conference put it, into “supranational entities with implicit power to dictate macro-economic policy”?
There are many other aspects of their functioning which cast doubts on their independence. For instance, there have been allegations of their taking money for tailoring their assessments, marketing commercial products and so on.
There is thus enough justification to subject them to the continuing evaluation of an international overarching watchdog mechanism equipped with the authority to rate and regulate them.
The idea has been canvassed by many governments and in global forums for some years.
It is high time steps were taken to this end by entrusting the responsibility of formulating a scheme to an inter-disciplinary body of eminent persons of impeccable reputation set up by the Economic and Social Council (ECOSOC) of the United Nations.
- Umesh Shanmugam