Monday, August 8, 2011

U S IS TOO BIG TO FAIL, FALL.


Last week there was a terrorist attack on USA. Unlike the previous one, this one from the home-grown. Dow Jones index fell by 5%. Tremors were felt in other markets too. The world’s accredited rating agency - Standard and Poor’s down graded the US debt by notch to AA+ from AAA. However, the other two rating giants – Fitch and Moody’s maintained the coveted AAA ratings, with a warning. S&P’s rating down grade has come in for criticism from US treasury department and from others. How credible is the rating agencies ratings? In 2006-07 the same agencies had rated the housing loan mortgage papers as A+, A and investment grade. Within months the world discovered they were nothing but junk papers. Millions of people lost their money, relying on the rating agencies ratings. That brought the world economy to its kneels. The biggest banks in the US collapsed. It had cascading effect on the other economies too. And it was the same US administration that bailed out those troubled banks by pumping $ 4 trillions. Where was the rating agencies wisdom when they rated the junk bonds as safe investment?

It is true that US economy is thriving on borrowed money. It is not yesterday’s creation. It was there earlier too. US federal debt as a percentage of GDP was 40% in 70s and around 60% in 90s. Now it has moved an inch higher. That is how the US economy has been built.

Consider the following:

US is the world's largest national economy, with an estimated 2010 GDP $14.780 trillion (23% of global GDP), has per capita income of $ 48000. This is the only country in the world, with a quarter billion population and above has this kind of per capita income.

  • Out of top 4 banks in the world, 3 are US based.

  • The top 10 richest people in the world includes 5 US citizens - Bill gates, Ware Buffet, Larry Ellison and Christy Walton and family of Wal-Mart, among others.

  • Exxon Mobil, Apple Inc, Chevron Corp and Microsoft find a place in the world’s top 10 companies in terms of market capitalization.

  • The world’s top software companies are all US based.
  1. Oracle Corporation
  2. IBM
  3. Microsoft
  4. Google
  5. Accenture
  6. SAP AG (Germany)
  7. Hewlett Packard
  8. Computer Sciences Corporation
  9. Yahoo!
  10. Computer Associates.
  • Fed reserve holds 8200 tonnes of gold, second only to euro zone. India at 11th position, our central bank holds only 615 tonnes of gold.

  • Out of top 10 pharma companies in the world, 4 are US based.

  • Measured solely by revenue numbers, the U.S. is the undisputed leader of the retail industry. Wal-Mart is not only the largest global retailer; it is also one of the largest companies of any kind in the world.

  • Most valuable brands in the world are all American - Apple, Google, IBM, McDonald, Microsoft, Coca-Cola, AT &T and GE.

The world’s economy revolves around US economy, it is too big either to fail or fall. The tremors we are feeling toady are temporary in nature. US need to do some structural adjustments. They will fix it sooner than the world thinks.

"If nothing else takes place, meaning, if all other variables hold and there isn't say, a new problem in Europe, it won't make any difference,". This is the comment made by Warren Buffet, on the rating agency down grading the US debt. World has reason to believe him.

According to IMF, that the US needs urgent fiscal consolidation but it also regards US economic prospects as stronger than any other advanced economy, and that its financial sector is in better shape, meaning the risks of default-inducing shocks are lower.

The world keeps turning even without an AAA rating. Remember, the best brains in the planet lives in USA.



6 comments:

  1. Dear prasanna,

    Your write ups are wonderful.I regularly read your blog.

    Please advice is it right time to buy frontline stocks now for holding for a year??? or should i wait for some more time? if yes, till when??

    thanks and congrats for your great writing.

    vijaya

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  2. Thanks for keeping spirits of your followers at high level

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  3. I am sure that ratings change would not make much difference but some facts-
    1- Huge Bailouts given by Bush and then to Obama added to the increased dollar in the economy
    2- Fed has given rights to some banks to print dollars and economists say that dollar is not worth even of the paper on which they are printed. see the below video
    http://www.youtube.com/watch?v=zbn-GLNZFmA&feature=player_embedded

    3- All govts interprets corporate intersts ad national intrests and US follow it too much.... US ppl can not even raise vegetables in their backyards and are forced to eat the processed food products of food giants ...

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  4. Still, there is no alternative to dollars.

    ReplyDelete