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US’ Economic Woes:PANIC BUTTON PRESSED, by Monish Tourangbam, 10 August, 2011 Print E-mail

Round The World

New Delhi, 10 August 2011

US’ Economic Woes

PANIC BUTTON PRESSED

By Monish Tourangbam,

Research Scholar, School of International Studies (JNU)

 

Economics forms a prime agenda in international politics. And, it is the preponderance of the American economy that has so far put the United States at the forefront of world politics. Recall that it was the shifting of Britain as an economic power to the US that ushered in an American century. At the end of World War II, America played the major role to help fashion the structure of the international economy and since has maintained the numero uno position. It was the strength of the American economy that took it through the Cold War and brought the end of the Soviet Union, thus giving rise to many advocating the near permanence of free market capitalism.

Today, it is the same economics that has brought America to such a stage where others are beginning to doubt the strength of its dollar and starting to point fingers at its ability to lead the world. It is the same economics that has given rise to debates about America’s decline and the rise of other nations, most prominently China, the second largest economy in the world and one  popularly called ‘America’s banker’, holding around $1.16 trillion in US treasury securities.

Undoubtedly, America will remain the preponderant military power for years to come, but the shifting of power in economics and the losing of confidence in the American dollar is too visible a fact to ignore. In the 21st century, military adventurism in Iraq and Afghanistan has dearly cost the American economy, and dwindling public support has eroded the popularity that President Obama brought into the White House.

Moreover, the inability of the two parties, Republicans and Democrats to come to terms over some major economic issues has proved a significant hurdle. Many analysts believe that the two are still out to score brownie points in the wake of the coming 2012 presidential elections rather than figure out a way from the current mess.

Albeit, the danger mark that has caused widespread panic around economies in the world was the recent downgrading of the American economy from AAA rating, the highest possible level, by one notch to AA+ by Standard & Poor’s, one of the three major credit rating agencies besides Moody’s and Fitch. The latter two still give AAA ratings to the American economy, but have reportedly warned to downgrade if the projected Government deficits go uncontrolled.  

Indeed, a gloomy prediction for both the American and the global economy at large, which is just crawling out of the 2008 global financial crisis, sourced largely to economic inadequacies in the United States. Looking at the dire deft crisis in the Eurozone and the not so positive predictions of the American economy, the international economy is indeed being thrown into a tizzy.

The Standard & Poor’s (S&P) rating has shown that it is not satisfied with the recently-signed Deft Deal in the United States which intends to put in various measures to rein in the American debt and deficit crisis. According to this credit rating agency, the savings from the just signed America’s deft deal are projected at $2.1 trillion; while a larger level of savings is needed -- at least $4 trillion either through spending reductions or tax increases – is required in order to start lowering U.S. deficits in the coming years.

Fear is now pervading different economies around the world that another downgrading could occur if the American economy fails to perform well in the coming months. The pre-eminent fear is that all these would lead to a double-dip recession, which followed by a short-lived recovery, will lead to another recession.

It is on the backs of their efficient economies that Asian countries like India and China are being seriously considered as major centers of power. When the global financial crisis shattered confidence in the western world, major Asian economies are believed to have successfully weathered the crisis. Now, another economic storm is brewing at the center of the global economy and one needs to wait and watch as to how the resilient Asian economies, including India will measure up to the challenge. The UPA Government is itself embroiled in some major scams and the sheen of the Congress-led government is being attacked from all corners.

Moreover, many analysts believe that at this juncture the Indian economy is not very strong, thus putting a big question mark over the overall impact if the American crisis plunges deeper. According to observers, falling global demand could also depress foreign direct investments and dampen the recent boom in Indian exports. “India will withstand this better than industrialized countries, but it will be hit badly enough” in the event of another global recession, warned Kaushik Basu, Chief Economic Adviser, Finance Ministry.

As such, there are different predictions from various quarters as to what will unfold in case the American situation turns direr. Addressing a function organized by the Confederation of Indian Industry (CII), Finance Minister Pranab Mukherjee asserted: “Our growth story is intact and fundamentals are strong. Our markets have the capacity to withstand the negative sentiments affecting the external world.”  However, the Federation of Indian Exporters Organizations (FIEO) Chief Ramu Deora noted: "The downgrading will lead to further appreciation of the rupee against the American dollar which is already facing the heat, thereby blunting our competitive edge.”

Again, while FICCI Secretary General Rajiv Kumar also contended that problems in the US would affect Indian exports, the Prime Minister's Chief Economic Adviser C Rangarajan told Reuters: “I don't think India will be much affected (by the downgrade) beyond the temporary market jitters and we should still grow at 8.2 per cent (this year).”

Uncertainty is in the air as the bastion of free trade capitalism and the centre of global economy gets badgered and remains in the danger of suffering a fatal knockout. Time and again, the American economy has been written off, but history is witness that it has come out stronger than ever. It came out of the Great Depression to emerge as a world superpower and it retained its numero uno position despite many believing in the 80s that Japan might trump the US.

But, will history repeat itself? Will America again emerge unscathed, to retain the scepter of world economic power? As far as India is concerned, many analysts point out that New Delhi has not gone ahead with the much-needed economic reforms to withstand severe crises. One needs to wait and watch if India gets a cold when ‘Uncle Sam’ sneezes. Prime Manmohan Singh, who engineered the country’s famed liberalization in the early 90s, is under threat of losing his well-built image among the Indian public, with his Government caught in a mess of domestic controversies.  As is often believed, the worst of situations brings out the best in a person. If the economies in the western world plunge deeper and spread woes around the world, it might just prove a litmus test for Manmohan Singh, who happens to be an economist of global repute. ---INFA

(Copyright, India News and Feature Alliance)

 

 

 

 

 

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