The US crisis: blessing in disguise?

With the very integrity of Standard & Poor in question, its downgrading the US credit rating is unlikely to have a lasting impact on the global economy. Also it has brought some good things to cheer about.

The BSE may well have crashed by 460 points on Monday morning, but investors pressing the panic button is just a kneejerk reaction which is in alignment with the global stocks sliding temporarily. The fall in the market in fact provides you with a buying opportunity. If you go by Warren Buffet's tips, buy when others are selling. “I buy on the assumption that they could close the market the next day and not reopen it for five years,” he said. So, say thanks to S&P, buy and hold it.

You have to thank S&P for one more reason. With the US sliding one notch down from triple A to double A plus, it has to pay more interest on its bonds on account of default risk, and the crisis has come as a blessing in disguise for investors. Now, technically we can say bonds issued by the UK, France, Germany and Canada are superior to the US bonds in terms of safety as these countries continue to enjoy AAA rating. But, none of these bond markets has the liquidity or the depth of the US markets. So, enjoy the windfall.

China, the top most creditor of the US, is trying to create a hue and cry, while India and others are adding to the noise. The move is uncalled for, but necessary to put pressure on the still biggest economy to reap benefits of the crisis. The child who doesn’t cry will not get milk.

However, the crisis has a thing for exporters to worry about. With the US ending up spending more on debt service it might trigger slowdown if not a double-dip recession as the world fears. The slowdown stoked by the weakening greenback might make a dent on their profits, and currency insurance would be a better bet.

But, there is no immediate solution for the decline in sales that slowdown is expected to result in. The nervousness of software companies is already being felt and the bellwethers have shown the signs of cutbacks and lay offs.

A weak dolor will help bring down prices as it will reduce the cost of oil imports which has been a large contributor to inflation. Weakness in the US markets would also curb demand for commodities and keep the process under check.

Alas, lower inflation is not useful for the end user in India as the very calculation of inflation is defective. Do you remember the paradox of people paying high prices, when the government was moving heaven to earth to avert deflation amidst the downturn two years ago? People were not able to comprehend the cruel joke of the government projecting a lower inflation rate when in reality commodity prices continued to tread northwards.

The urgent need is to change the archaic method of assessing inflation. Revive the basket by including commodities that matter in daily life, and go for consumer price index regime. The current wholesale price index system is a bogus with not passing on the benefit of the lower prices to the consumer. We know there are many hurdles to put CPI in place, but it is the time for us to take it on the chin.