A rather cute analogy and an interesting moral – Read on..
An interesting analogy caught our eye this morning. We have all been brought up on a healthy dose of the ‘ant and the grasshopper’ story as kids in school. The story ends quite vividly. Winter comes, and the ants thrive on the resources they have worked hard to collect all summer. The grasshopper, for all his frolicking during that time, dies a sad death as winter intensifies and has no food to bank on. Something uncannily similar is happening in the world today, albeit with one big difference. The ending may not be so similar after all. The ants are the Germans, Chinese, and Japanese. The grasshoppers on the other hand are the Americans, British, Greeks, Irish, and Spanish.
The ants have been producing enticing goods that grasshoppers want to buy. What the ants have been getting in return for selling their wares has mostly been grasshopper debt. Promises that the grasshoppers will pay back in future their debts to the ants. But as the ants have realised, a consumption binge based on leverage can go on for a while. But not forever. The day of reckoning has now arrived. And the grasshoppers have nothing to pay the ants. So some of them print more money (Americans), and some try to convert to ants by slashing their fiscal deficits (Greeks). The former then end up paying back the ants with a currency of lower value. The latter leads to huge write offs as some grasshoppers die in the process. Either way, the ants have turned out to be the losers. The new moral of the story? Do not lend to grasshoppers!
Read the original post: http://www.equitymaster.com/5minwrapup/detail.asp?date=5/28/2010&story=2