The least bad decision

As we have just entered the last quarter of the year, economists and business men are trying to anticipate what 2010 will be. So do policy makers and last week the Federal Reserve has published its Beige Book . For those of you, who are not familiar with the Beige Book, it is a report published 8 times a year gathering useful economic data from 12 regional districts in the United States, whose objective is to summarize the state of the US economy. The Beige Book is also an important tool upon which the Federal Reserve counts to make decisions around interest rates. The Beige Book October 2009 edition provides two important news: one good and one bad. Let's start with the good one: the US economy seems to have reached its bottom at least it does not show signs of more degradation. However the bad news is: the US consumption is weak and when we know that consumption represents 70% of the US GDP, it means that the recovery will be slow. Overall there are two things to learn from the last edition of the Beige Book. First of all, American people seem to change their habits and behaviour. They tend to save more and I strongly believe that this change is good for the world economic system in the long run even though it is no in favour of a strong recovery in the short term. Indeed, the US people could not continue spending so much using debt. The second interesting aspect relates to how the Federal Reserve will then adapt its monetary policy going forward knowing that US consumers are spending less money. On the one hand low interest rates facilitate speculation and contribute to making the US$ weaker. To a certain extend this situation could generate a new bubble (I wonder whether it's not already the case). On the other hand, hiking interest rates would slow down or even stop a recovery, which is already slow. In summary there is no two best alternatives to choose from. The US and world economy depend on choices between bad scenarios and the challenge will be to choose the least bad. But when we think where the world economy was last year, this is maybe not a bad situation to be in now.