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Moody goes to economics class – and comes out unhurt

India loses investor appeal: Moody’s

When you read a headline like the one above, you know (if you already don’t) that rating agencies are as ridiculous as, say, journalists. Rating agencies are supposed to predict future performance, based on data, intuition, industry knowledge. Given that India’s economy is still supposed to grow at a 5-7% this year (5% as per the Economist, 7% as per the Government) – in a year when most global economies are tanking heavily, contracting and barely standing still – I’d say Moody’s is as wrong as ever. In fact, they sound a little peeved that their recommendations on reducing interest rates were not heard by the government.

Of course they have so much credibility, since their – and everyone’s – excellent judgement in the 1980’s for Japan worked so fine, didn’t it. So what are Moody’s reasons for the outright downgrade?

Moody’s stated “big concern” is the government’s debt: “One of the core concerns is the unsustainable fiscal position. …,” says Sherman Chan, economist at Moody’s Economy.com.

How worrisome is this worry? Apparently, from here and here, quite:

…the budget deficit is expected to balloon to 6.1% of GDP in fiscal year
2008/09 (April-March) and remain at 6% in 2009/10, but it should then narrow
gradually, to reach 3.6% of GDP by the end of the forecast period.

Compare this to the US’s projected deficit of 12.3% of GDP:

An eye-popping $1.75 trillion deficit for the 2009 fiscal year underlined the
heavy blow the deep recession has dealt to the country’s finances as Obama
unveiled his first budget. That is the highest ever in dollar terms, and amounts
to a 12.3 percent share of the economy — the largest since 1945. In 2010, the
deficit would dip to a still-huge $1.17 trillion, Obama predicted.

So, 6% of GDP vs. 12.3% of GDP. Of course, the rating of the United States is correspondingly affected. Not!:

Still some analysts noted than an outright default was actually impossible,
since the United States only owes money in dollars and could therefore simply
print cash. In that case, inflation would be the more likely outcome.

“The U.S. is not going to default. It’s silly,” said Joseph LaVorgna,
chief U.S. economist at Deutsche Bank Securities. “The U.S. was, at its peak,
roughly almost 30 percent of world GDP. The U.S. may inflate its way out of its
debt obligations, but it will not default on its debt obligations.”

So easy, no? Not just do you print yourself out of your debt to your citizens, you print yourself out of debt to others, because YOU define the MONEY and YOU make the money. And therefore, you can never be downgraded, and Moody can never really be miffed with you and send out stupid reports.

Looks like it’s time to design a currency symbol for the Indian Rupee too. That’ll solve everything and make Moody change his mood to “happy”, no?

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