Of Retail and Current Account Deficits

I spent the day at a few places looking for things that I wanted to buy for others, and was faced with the full retail muscle of the US. Everything is about positioning, about eye-line shelf space, about getting you to spend much more than you intended to. And it works. Pretty much everything is cheaper here - from guitars to clothes and shoes to perfumes. Profit by volumes is the mantra, well supported by the appetite of the American consumer to spend whatever his credit card can carry ... the consumer owes the bank, the bank indirectly owes other financial institutions, and everyone eventually contributes to the current account deficit that is serviced by investors all over the world.

Not many people appreciate the enormity of what this means. Some may be unaware. People outside of the US, all over save their hard earned money and shovel it into banks ... at some point this rolls up to the country's reserve bank which dutifully uses it to buy US $.
Why?
1. Returns on currency and denominated assets.
2.Oil.

Why is oil traded inUSD? We'll save that for another time.

But this is kinda amazing. As long as people in other countries postpone consumption (save), and people in the US consume as fast as than they can, this system works. Expensive credit in other countries ( high interest rates) and real cheap credit in the US ensures the snowball keeps rolling.

Why does this happen? Because the expected return on the $ or the $ denominated assets is expected to be strong and reliable. Why? Because everyone here will buy and companies will turn strong profits.

So where does this leave you? In your own circumstances, in your culture that strongly influences your economic strategy, which keeps the world rolling?

What can throw this out of gear, you ask? Hmm..... oil for one... the specifics of that mechanism another time. ... what else? The climate perhaps . ..... and not to mention declining corporate profits and uncertainty in the financial markets. We've been on a pretty long bull run worldwide with equity, gold and oil all moving in lockstep. Remember gold is supposed to be negatively correlated to equity movement.

Till then, turn on the lights, stick on the labor day sales and let the cash registers ring.