Wednesday, August 10, 2011

Pay money to Pay money

I am a big fan of commercials on television, and lately, as the quality of television journalism has degraded, I watch more commercials and less news. The commercials in India are extremely well made, and if there are any human emotions that lie buried in the fortress of your subconscious mind, the commercials will bring them out. There are toothpaste ads, that will send you scampering to the bathroom, to brush one more time. There are ads for water filters, where a glam-queen of the seventies from Bollywood, who does not look a day over fifty, will convince you to get one for yourself. May be, it is the water she drinks that makes her look so young. And then, there is a guy with a blue tooth, who will slap a bluetooth headset to your ear, in case you haven't bought one yet. 

But the cake is really taken by the financial institutions -- banks and insurance companies. They will make you cry, when you see how their agents stand by you during the times of need. Sometimes, they come in person, sometimes, they send a baby elephant to play with your child. And yesterday, I saw a commercial, in which the bank was trying to convince people not to finance their home loans with pre-payment penalties.A housewife, when told about the concept of prepayment penalty on loans, asked a surprised question -- "Kya, aab paise dene ke bhi paise dene padenge? (Now, do you have to pay money to pay money?)"

And that is what focused my attention back to the global financial crisis. Just a few days ago, Standard and Poor's downgraded the United States' credit rating from AAA to AA+. Apparently, for people in finance, this is a huge deal. The world will now have less confidence in American debt, and the Americans will have to pay a lot more in interest. All this, at a time when the American economy is struggling. With massive job losses and pay cuts. And then, there is talk about another recession and the impact it will have on other countries, such as India.

Although I don't live in the United States any more, I have deep sentimental ties to that country, since I spent my formative years there. I earned my first paycheck -- and paid my first taxes, in America. In many ways, that country made me what I am today.  India will always be my mother, but America has been the rich uncle, who put me through college and made sure that I had a decent job after that. And so, I take a deep interest in what goes on in America. And every time, I hear bad news about that country, I feel sad. I would really like to see my uncle happy, because after all, it's my uncle we are talking about. 

So, it was sad to see President Obama go on television trying to boost people's confidence levels in the American economy after the credit downgrade. But, I have a small disagreement with Mr. Obama on this. I don't think that an American president needs to go on television to defend his country's ability to borrow from banks. America, in my opinion, is much above that.

A few weeks ago, one of my colleagues was talking about a very specific piece of technical equipment that he needed, to perform a very special experiment. At first, he thought that no one makes that kind of stuff, since what he needed, was extremely specialized. So, he was thinking of rigging up the machinery himself, but, he didn't have the right skills to do that. Then, he came across a small company in a mid-western state that makes what he needed. It was a product of precision engineering, combined with the cutting edge of science. And, only one company in the world, makes it. An American one.

In world media, the Americans are made out to be beer chugging, football watching, rude people, who cannot speak a word of French. But, in most American households, there is a space in the garage, where you can find a decent workbench with tools. American intellectuals, unlike most of their European and Asian counterparts, are not afraid to work with their hands.

When you tinker around with things, you discover things. Sometimes, you make things, that are bought by millions around the world. Then, you can get what you made, manufactured in China. And then, take that trip to France, and speak the notoriously accented French you are so infamous for. But, the point I was trying to make, is, that there are millions of households in America that have workbenches in their garages, that can produce real things. Companies like Hewlett Packard, started in garages. A country like that, can fall on hard times, but there is no need to apologize for maxing out the tab. It happens to all of us.

Mr. Obama should fire up the schools and the colleges in America. And the spirit of entrepreneurship that defines the Americans. In the end, a bunch of wall street traders cannot change the character of a country. And character, is a much better measure of a country, than its balance sheet. In the long run.

This debt crisis has put the American central bankers between a rock and a hard place. If they want growth, they have to keep their interest rates low. But, their creditors don't like low interest rates, since they make less money by lending money to the Americans. China, which is a major creditor, has already started talking about an alternative reserve currency to the US Dollar.  If they raise interest rates, the US economy might head into another recession. In my opinion, they should keep the rates low and help their economy. If no one is willing to lend money, sometimes, one learns to make do with less. But, in the long run, it goes a long way.

Since the interest rates in the US are close to zero, I was joking with my wife that may be, the rates can now be made negative. That means, that one has to pay money to a bank, to keep their money in the bank. My wife, mimicking the lady in the commercial, said, ""Kya, aab paise rakhne ke bhi paise dene padenge? (Now, do you have to pay money to keep money in the bank?)".

My take on this? Who wants to keep money in a bank anyway!


  1. If the best school is downgraded, but still remains the best, what difference does it make? People will flock to it anyway.

    With America's stranglehold on the rating agencies, it is a bit difficult to believe that they could downgrade USA, without the GOTUS being OK with it. Maybe it's a bit like the CEO getting down and dirty in the trenches, when times are bad.

    When I was in USA in the 90's I would recommend everyone to go to USA for some time at least. When I went again in 2004, it had changed for the worse. I now reccomended everyone not to go to USA. In either case, it did not matter - everyone then, and now still want to go to the USA - that allure will not fade so fast.

  2. Sudeep, you make a valid point about the best remaining the best, in spite of "ratings".

    Talented people still want to go to the US, because it is still seen as the "land of opportunity" by them. But, with decreasing economic clout, I doubt if the US will be able to
    maintain all its institutions of excellence. In my opinion, the desperately need to, since their long term survival depends on these institutions.