The sovereign credit rating downgrade of the US government by Standard & Poor’s late on August 5 was the culmination of what the agency termed “political brinkmanship” that made the government’s ability to manage its finances “less stable, less effective and less predictable.” The other two agencies — Moody’s and Fitch — that had retained their AAA ratings of the US following the debt ceiling restructuring recently may have no option but to follow suit as S&P officials said it is unlikely that the country will regain its top credit rating soon. Finally the cat has been belled. The aftershocks will soon be felt. Another global financial meltdown cannot be ruled out.
Set to come under a cloud is the domain of the social security system as it works in the US now. Because, it may soon come to pass that the US will have to choose between cutting the social security budget and its defense budget. It could turn out to be a real political hot potato for the Obama government if it is forced to choose between food stamps to the poor and stopping military aid to countries like Pakistan. It is a tough decision for the US that has taken for granted its world leadership position for too long. Tens of thousands of hungry people back home may be too trivial a reason for them to get off the pole position overseas.
China and Japan may have high stakes in the crumbling US economy, but the Indian markets will continue to bear a major brunt of the downgrade, almost as if S&P had targeted India. The massive crash in the Indian bourses over the weekend means the FIIs will play it safe in the short-to-medium term and not pump in any money. A reverse flow cannot be ruled out. In other words, the Indian markets will remain bearish during this wait-and-watch period and the domestic investor may have no option but to buy into gold. This, as the runaway inflation has ensured that parking funds in banks is not a viable alternative as the real estate sector at the best of times have remained tricky.