World's Major Consumer Unable to Remain Stronghold of Consumer Demand

American consumers are not in a hurry to spend, production remains weak, and conversations about the risk of deflation become more acute. It is likely that the U.S. government will prepare new incentive programs that will inflate national debt. However, the experts believe it will not affect the dollar in a negative way.

The market froze in the last days of summer, when the entire Wall Street is on vacation. But in September, the formation of new trends on payrolls can be expected, says financial analyst of FxPro Alexander Kuptsikevich to Bigness.ru.

According to the specialist, in 2008, the market began to assess whether Lehman can pay off its creditors. In September of 2009, gold added one third in price for a little over a quarter. These events were contributed by the return of the economy and world trade to growth which heated the debates about the enormous scale of incentive programs causing inflation.

Almost a year after the peak of unemployment in the U.S., we see that it is only lower by 0.6 percentage points. The talks about the risks of deflation are becoming more urgent as a huge outflow of demand strongly moves us away from a strong recovery,” the specialist said.

The main consumer of the world, the U.S. will be unable to indefinitely remain a stronghold of the demand for goods, while other consumer markets are either not ready (i.e. oriented for export) or very small. Aging Americans realized that they do not have enough savings to retire, and have huge debts on current loans. This further constrains the growth of spending in the country. In addition, the production remains weak, because it cannot rely on its own domestic demand.

“I will venture to assume that real estate has ceased to be a catalyst for demand for many years to come, as it happened with Japan at a certain point. The number of renters in the U.S. who do not plan to buy a house has increased up to a quarter. If we develop the application of this analogy, it can also be quite reasonable to assume the possibility of numerous incentive programs for consumer demand and low GDP growth (zombie-economy). This inflates the national debt, but there is nothing fundamentally wrong with the dollar,” says Alexander Kuptsikevich.

To test this assumption, the expert proposes to look at the government bond yields in Japan, which is about 1%. Now the Americans are on the same path. Their long-term bond yields fell to record low levels (except for the crisis in November of 2008). You can see that the ratio of the government debt to GDP at 200% does not prevent from keeping the cost of servicing this debt low in presence of a developed market. However, it is almost impossible to maintain high growth rates.

“To maintain at least the advantages of low cost of debt servicing, the Americans will protect their role as a reserve currency by all means. With respect to the dollar we can say that low interest rates caused by the threat of deflation will eventually translate into the strengthening of its currency, as it is happening now and happened in the 1990's with the yen,” explains the expert.

The analogy is confirmed by Switzerland, where the low inflation supports the strengthening of the Swiss currency (and often on the contrary, the growth of currency reduces inflation).

“We conclude that the resumption of the inverse correlation (the worse is the news from the U.S., the more the dollar is rising) is fully justified, and we return to our old forecast that in the absence of large-scale and fundamental changes in policy, the dollar may rise for about a year under the conditions of a very low world economic growth. Again, remember our goal for the euro/dollar at $1.10 by the end of 201 and $1.15-1.20 at the end of 2010,” summed up the expert.

Marina Volkova.