The month of August that shook the world

Now that we are almost at the end of this month let us take a moment and look back. The month of August, changed many things, as we know and witnessed many moments that defined history.

• Muammar Qaddafi lost out to the rebels/NATO force in Libya ending his rule of last 42 years.
• India Cricket team lost their no.1 Test team position in a spectacular fashion.  
• A 74-year young man showed the Indians how to push the juggernaut of Indian political system.
• S&P, for the first time in the history since the rating system came to be, downgraded US credit rating and World economy inched closer to another tumble.
• After S&P downgraded US credit rating to AA+ this month, Moody downgraded Japan's credit rating to AA3 last week. Japan's prime minister resigned and Japan got a new prime minister.
• This August, official national debt for US hit $14.53 trillion which is 100% of US GDP of last year [source: AFP].  This is the first time since 1947.
• As per 2010 figure total debt that the human population carrying is around $160 trillion. With world population of around 6.7 billion it means that every person is carrying in average a debt of $24000!

Too many bad news on financial front. Are we going for another economic collapse? The Economist Global debt clock shows half of the world in red [and the figures are dated as far as 2010]. With GDP growth getting jettisoned across globe, it is quite obvious that the situation is not going to look any rosier tomorrow. Greece, Spain, Italy, England all are struggling to get a hold of their expenditure. But why this is such a big issue?  Scaled down ruthlessly, this to me looks like a man with annual income of X carrying a loan of 2X or 2.5X. I mean consider US, their total debt is almost same as their income i.e. production measured in US dollar.  I know many people, carrying a loan of 6X or more and they are doing well. Well I do not know their credit rating though. But it is obvious that they may not get another loan at lower interest rate till they bring their outstanding debt down to a level that is somewhat closer to their income. But it is still not a big problem, unless of course that person has difficulty meeting his annual expense [loan repayment included] with his present income. If that happens and with no promises of hike of income, the situation does pose a problem for that borrower, since his/her outstanding loan will continue to increase every year posing the risk of him being a defaulter. Creditworthiness or credit rating in many sense gives a measure of risk of defaulting for the borrower. In other words, S&P and Moody are saying that they believe that with lower or negative GDP growth, both US and Japan have increased their risk of defaulting on their loan repayment. And if US, Japan, and Europe together default, the present economy system that we know of, will collapse. Which means certainty of US dollar, UK pound or Euros will go away. That necessarily means that the control that these countries [particularly Europe and US] impose on the world order will be lost leading to another anarchy [last one we witnessed during WW II]. Pretty frightful to imagine!
So what is the way out? 
Let me take that in next post [realized that long post does not make it easy for reading]. In the meantime here is an interesting article from Gulf News on the issue of Global debt .