US Economy Crisis: Effects on common people in US, India, Canada

United States of America has long been considered as the most developed, advanced country, which is partly true but the country's prosperity we see in terms of infrastructure, roads, buildings, research & development etc or the kind of prosperity projected in Hollywood movies comes with a heavy...infact very heavy baggage which can be an unbearable burden to not only US but also many other countries of the world, and its a 100% truth when I say almost every person in 3/4th of the world would be affected in some way or other due to the current economic crisis in US; and most of the cases, its pure mayhem and bloodbath.

Most of the commoners who are not really conversant with economics, political situation, stock markets don't take this situation seriously until they face the heat themselves (which is now, very much impending). This post is written with an intention to inform beginners and laymen as what this US crisis may mean to them.

First things first: US is not as rich as it projects itself or as people perceive.Yearly revenue of US is around $2.5 trillion dollars and expenditure is around $4 trillion dollars. It means every year the deficit comes to around $1.5 trillion dollars and the current total unpaid debt is in the tune of $15 trillion dollars which is expected to go up gradually.

Another problem is that US' liquidity (cash amounts which can be used) is relatively very low and if US is forced to pay debts in large amounts, there is no way for US but to make a default or skip payments.

So three solutions for US to deal with this situation (if they ever want to deal with this problem) are:

1. Dramatically reduce expenditure
2. Skip payments - especially money owed to other countries
3. Raise more money from public

All three are dangerous and hence as I said 3/4th of the population in the world will get affected in some way or other. Lets see why.

Reducing Expenditure:

It means a lot. All infrastructure projects, research activities, development activities should be brought to a pause if not a grinding halt. So the development will have to undergo a huge hibernation for sure. This may save some quick money for the government, but will result in huge negative effects. If US wants to cut costs, it will have to stop supporting a lot of industries, companies and hence a dramatic number of US residents can safely assume that they will be FIRED from their jobs.

If we think only US residents will get affected, go and to read this. US is a major trading partner with many nations of the world (including India, Canada - two countries which I represent). So if US pauses its development activities, it will invariably mean that it reduces its businesses with trading partners and hence other countries will loose a lot of income and hence industries will plunge into unprecedented losses.

The worst calamity from Indian perspective would be the software industry once again. Software industry is India is thriving only because its clients are in US. If US puts sanctions against its own companies, there is no way Indian software industry can be saved. Similarly all industries, businesses, companies, corporations which are directly dependent on US will have to take a nosedive. The same applies to Canada as Canada-US are not only major trading partners but also have free-trade agreements which will again take a bow. 

Bottom line: Loss in businesses which is directly proportional to huge cost cutting and hence loss of jobs.

Once software industry and all industries in India, Canada etc which are dependent on US fall badly, obviously, the purchasing power of people working in those industries will be reduced drastically and hence other businesses which are thriving because of such high spenders will take a blow. So its a cascading effect which can fall on almost every business and hence on most of the common people. So be ready for this ill-effect

Skipping Payments:



A bad idea but this can save US a lot of jobs and losses. But whose bills can US default is a million dollar question (or may be trillion dollars ;)). As mentioned earlier US is low on liquidity and all its developments are happening just because other countries are investing on US Government bonds and securities. China and Japan have invested around trillion dollars each in US because they could not find any other safe havens to park their wealth. Now no prizes for guessing who is in panic mode :)

As recent news articles scream, a credit agency Standard & Poor's has identified that US "may" default payments as its under heavy debt. US' credit rating has been downgraded from AAA to AA+ which shocked the entire world in general but China and Japan in particular. Now US and China are like two blind people guiding each other. If US defaults payments, China will suffer a lot and its imminent that Chinese economy will plummet bigtime. If China decides to take off its investments from US before US makes any bad decision, then it will cause a mayhem in US, the reason: Once China takes out its investments, other countries will follow but US doesn't have enough money to pay everybody. Then US treasury will be forced to turn its board and act like a fraud bank which cheats its account holders.

Also once China or any other country starts pulling off investments, the market frenzy will lower the value of those assets. Thus China, Japan and even Russia to an extent are playing with a double edged sword. The frustration could be easily seen when leaders of these countries lambasted US saying its a 'Parasite' :)

Raising more money from public:

This is the easiest for the Government of US to do so. But it means hell to US residents for sure. Higher (almost double) taxes, home mortgage prices, interest rates on car loans, personal lines, credit cards, more expensive products, services, cost of living. So more money to shell out to Government and less money for their own lifestyle. More corporate taxes will mean more expenditure on companies which will be transferred to employees through more income taxes, less benefits and most of the cases, loss of jobs. This opportunity can be exploited by some companies to get rid of employees though they don't need to.

So absolute scarcity of money among individuals, businesses, corporations means another RECESSION. Recent recession (2008-2009) caused some 20 million US residents to lose jobs and this time it will be worse because of the debt bogey, low confidence, international pressure. Recession also means ill cascading effecs on other countries like India (as mentioned earlier).

So truly US has become a parasite or white elephant on the whole world who went crazy with investments and over dependence on US. US has exploited the situation and has now held the world for ransom.

Worldwide Bloodbath

Now coming to stock investors, portfolio managers, mutual funders etc, they should get ready for the worst. Just a downgrading of S&P credit rating on US has triggered a massive plummet in almost all Asian markets, but Indian finance minister Pranab Mukherjee showed his bravado by saying India is ready to face any situation. But that's a silly assurance because US economy crisis can have a devastating effect on all major economies of the world.

Before explaining why, I just want to inform beginners that the value of any stock will decrease if more and more investors start selling and obviously the value will increase if a lot of investors start flocking to buy that stock. Now with US losing its credibility, major corporate or sovereign investors throughout the world will get more alert and would want to sell of their investments in safer markets just to neutralize losses incurred in US.

So once a major investor pulls its / his investments in other countries like India, it will trigger a panic reaction among other investors who will follow to do the same and hence all foreign investment corporations will start a selling spree thus reducing the value of their stocks (as explained above). Now when global investors show this no-confidence, immediately local investing companies and retail investors of that particular country will also follow the path and the entire market will be surrounded by those who want to sell their holdings which will trigger a massive dip in all stock exchanges across the world. Bombay Stock Exchange, Toronto Stock Exchange are no exemptions to this trends.

The only way to avoid this situation to happen is to hope that investors don't succumb to brouhaha and don't undergo knee jerk reaction which might cascade into destabilization of economies.

A word to investors

Those who already invested their money in stock markets should refrain from selling at this point. Selling will cause a negative effect on the market and also the current value of the holding will definitely be not as good as what it was and hence investors will have to incur losses. Just forget about investments for a while until the market stabilizes again. This might even take a couple of years. But nobody with head over shoulders should attempt to sell off their shares in such bearish markets.

If recession occurs, its a bad phase for a lot of people, but not for those who want to invest their money in shares, real estate, bullion etc. The costs, prices and rates of almost all shares, houses, assets etc will hit rock bottom and there is no better time to invest than this. One of the ways to end recession is to invest money in such situations.

PS: The author is an MBA in finance and a close observer of global economic and political developments. That's ME :)