Some years in the “24-ghante-mein-duniya-khatm-ho-jayegi (DKHJ)!!” news channel convinced me that ‘the end of the world’ is a journalistic bogey. When the US debt crisis was rocking our boat, I therefore bet that the official $14.3-trillion cap will be raised, Obama will concede a cut in spendings, and he’ll wangle from the Republicans a small rise in taxes.
 
I got only 2:3 right. Obama bought peace over taxes, but he spared the usual suspects, the oil companies and the rich with tax loopholes. $2.4 trillion of cuts in spending were agreed upon, $1 trillion right away and the remaining at the end of the year, in return for a $3-trillion increase in the legal cap. The result is that S&P has cut the country’s rating a notch, from AAA to AA+.
 
The American cousins of our ‘DKHJ’ news channel busy carping about how this might trigger a domino effect on other AAA countries; how the cost of money will now go up; how the dollar may weaken.
 
The Chinese are really upset because they don’t like question marks on the American T-bills worth $1.1 trillion they have bought. So much so that Xinhua has printed a castigating commentary on the US’s addiction to debt. Unnoticed here in India, Dagong, the Chinese rating agency, had downgraded the US a week ahead of S&P.
 
The downgrade doesn’t just affect Obama. It has implications on future presidencies. Indeed, Obama’s inability to usher bold spending cuts (heavier taxes on the rich and an attack on entitlements are nowhere in evidence) have mortgaged the US’s tryst with clean energy and an urgent upgrade of the country’s creaking infrastructure.
 
On both counts, sitting in India one feel worried, but this doesn’t look like the end of the world. If only our government wasn’t afflicted with policy paralysis, some FIIs may see safer havens in India.
 
That said, there’s no doubt that the US has bitten into the Satan Sandwitch. A global carnage in the financial markets is overdue and initial jubilation, over the debt deal and drop in oil prices, has proved to be misplaced. Gold, as the markets are showing, is a safer haven.
 
Clearly, there’s something the US isn’t getting it right. To understand that, first, a quick tutorial: Three months back, relatively unnoticed in India, Washington became bust. The official cap set by the US Congress on the amount of debt the federal government can legally borrow was exceeded. The cap applies to debt owed to the public (i.e., anyone who buys US bonds) plus debt owed to federal government trust funds such as Social Security and Medicare.

(In 1917, this limit was $11.5 billion. Before it was hiked this month, the limit became $14.294 trillion and was exceeded in the morning of May 16. By various extraordinary measures like suspending investments in federal retirement funds, Obama was able to bring total debt down to allow him to continue the great borrowing party until August 2. Then the music was supposed to stop. It didn’t, but the beat was changed).
Some moons ago, during a sabbatical, I was struck by the alignment between five celebrated US professors, David Moss, Robert Kaplan, Niall Fergusson, Bill Fruhan and Dick Vietor. The five men seemed to agree that the US voter must produce more of what the world is willing to buy, curtail her shopping list and accept higher taxes. Their prescription was: a) There’s no escaping regaining lost eminence in global trade and the US voter (and her family) needed to innovate at various ends of the value chain, b) she needed to bring down what US goods and services cost, c) she needed greater speed to market.

As my hundreds of data sheets were shared with 160 CEOs in my class, it was apparent that the US academic establishment knew where the problem was. But their government and the manufacturing complex weren’t up to the challenge. Nor was the voter. There are two categories of them. One was happy gorging on the Satan Sandwitch, uncaring about how little is being produced at workplace, happy buying more and more (from the world, read China) and least concerned about paying back. This 'type' doesn’t care that credit is cheap only because Obama (or any US president for that matter) isn’t saying, “hey, this is someone else’s money, a worrying share coming from Beijing.”

There is another set of Americans who own their money. This group is holding on and, in fact, triggering a recession. Obama’s options therefore had to be sub optimal. If he had raised taxes, the US voter would punish him. If he defaulted on debt servicing – the default wouldn’t have been for the whole amount, but slices of it – he would have lost face like never before,. After S&P, it may not be long before Moody’s and Fitch slashed ratings, the dollar drops, the stock market rattled more, and the world financial architecture hit by a earthquake of 7-8. Indeed, the cost of money is expected increase and since the treasury wouldn’t have had the money to repay, the US shopper’s credit-card bill would look a lot uglier.

Despite a humiliating deal with the original problem creators, and castigation by the Chinese, Obama has been merely postponing D-Day! S&P has sanguinely captured this reality. But since the US voter isn’t losing sleep just yet, may be,  all can do now is to hit the networks and tell them that India TV is mandatory viewing. DKHJ, after all!