The Downgrade of America / Where Does the Money Go ?

Let’s move a little away from science to the current global economic crisis. With the US finally losing its AAA credit rating and finding itself in a deep hole, the chances of another recession looms over them and maybe, the entire world? But is it going to be that bad, as it was in 2008-2009. Let’s see.

Recent 10-day market slide has caused global markets to lose as much as $4.5 trillion. As we all know that stock markets are a zero sum game or a closed system; that is to say, if someone loses money, someone else gains money. Let us further enquire how were the markets crash caused and who has gained all that money, if at all. If the latter cannot be ascertained, we must ask the big question: ‘Where has $4.5 trillion gone?’ It cannot just disappear. This question would need a financial expert and an economist to answer but I will try, only for the sole reason that no one ever tries to find such answers whenever markets collapse.

How much is $4.5 trillion, anyway? Converted to our Indian currency at the current rate, it is 207.18 lakh crores. This amount is approximately 120 times the amount of money lost by the exchequer in the 2G scam, uncovered by the Comptroller and Auditor General (CAG) in the second half of 2010. The basis of this article is not to cause unrest among the people but to understand, myself and for all who are interested to do so; how the interconnected global financial markets work.

The most obvious reason for this downfall can be attributed to risk aversion in the bear markets done by large institutional investors throughout the world. High national debt ($14 trillion and counting) of US and poor fiscal measures on the part of its policymakers is another. US is contemplating measures such as debt limit revision but is already threatened by China, its largest lender for doing so. Now that Standard and Poor’s have reduced their credit rating by one level to AA+, it seems that US has exhausted all its tools to save its economy.

The answer to my first question is, yes there are chances of another recession and it will affect the entire world like it did in the 2008-2009 period. As for the answer to my second question, I may have overlooked the most fundamental fact that the markets have lost $4.5 trillion. That is to say, the total market capitalization of world markets have eroded by $4.5 trillion and it is not the total of individual and institutional losses. But my enquiry is still valid, and my question can be rephrased as: ‘Is $4.5 trillion, the total amount of money received by institutional and individual investors spread across the world, through the sale of their equities and/or mutual fund units?’

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