The Future Has Arrived

All people have a list of goods and services they need and would like and they rate them in order of necessity according to affordability. Goods rated most highly are consumed now and ones desired saved for to be purchased hopefully at some point in the future. There is a gap where there is a good or service rated highly for consumption now but the money to purchase it is not available. Consumption that should really take place in the future, after much savings, is preferred to take place in the present. As human existence is finite the value of a good and service changes at which point it is consumed. A person may not be able save enough to pay for a college education until they are 65 years old but at that point its value to the person is far less. This is where the capitalist system comes in to play and someone with capital can lend the money to allow the consumption take place. A price is charged for this service which is usually the interest rate in addition to the capital which must be returned at some agreed point in the future.

There are some things of note with this. Firstly all that is of interest to the supplier of the capital is the return with investment. So what the borrower uses the capital for is an important consideration. If they want the money to travel around the world on a very expensive cruise, i.e. current consumption, as opposed to funding something like the bar exams, an investment, there is a higher risk that the capital will not be returned. So usually the activity of the borrower was considered by the lender and refused if thought that the chance of repayment low. However, the drawback with this approach is that there is a loss in the present time for people selling goods and services (the cruise lines). They now have to wait for that market and income stream in the future. In recent times the financial system decided to address this market failure and provide money so that all desired future consumption, luxury cars, second homes, designer watches etc could become present consumption. Competitive pressures of the boom years and availability of capital ensured high prices for the future consumption made current and highly indebted consumers. The problem of risk to capital remained but complex financial products were created and valued by complex financial models to remove much of this risk. Unfortunately this risk can never be removed only transferred which is becoming apparent more and more each day.

All of this leads of course to high levels of debt which may or may not be paid back and if it is not paid back capital is destroyed. With respect to current purchasing, highly indebted consumers have less disposable income to buy products leading to a slow down in sales and economic activity. An additional problem not currently spoken about is that eventually the future, where this consumption should have taken place under the old savings approach, arrives and the demand is gone. People already have the car and watch they would have bought so demand falls even further with further employment and income affects for the economy. These multiple effects on income make the high debt levels even more unsustainable and in the face of deflating prices the incentive to walk away from debt becomes higher. This leads to the final whammy for the economy for in a deflation spiral it make economic sense to delay consumption where possible. Is it rational to pay x amount for a house now when in twelve months, factoring in non purchasing costs such as renting, it will be y% cheaper? In cases such as this the consumer is very rational.