Consequences of consuming your future earnings now
Have you ever wondered what happens when you buy your most coveted car by way of a
consumer loan? Or for that matter, the plasma TV in your hall or a brand new tablet all by way of consumer loan?
What you are effectively doing is bringing into present, the demand that was supposed to take place sometime in the future. But can you continue doing this month after month? Certainly not.
There will come a time when your salary will fail to keep pace with the rising EMIs that you incur to pay off these loans.
The end result? You will have to either cut back on your expenses or live a life of austerity till the time your EMIs are paid off or even default in a worst case scenario.
You will be surprised to know that the same logic can be applied to the economies of US and Euro zone. These economies too have brought a lot of future demand into the present and are now staring at the consequences. Fortunately or unfortunately, unlike us lesser mortals, governments like the US have one more option besides defaulting and cutting back.
That answers to the name of printing money. So, it will be interesting to see what routes do these economies take.
However, if a noted bond manager Jeff Gundlach is to be believed, one should be prepared for both the scenarios i.e. hyperinflation if the Government prints more money and deflation if a default or similar such outcome occurs.
Looks like 2012 will be one of the most important years in many years.