As the US economy and markets weaken, perennial pessimists have moved to centre stage, arguing for the inevitability of a serious recession. Tax rebates will not help, they argue, because heavily indebted consumers will simply save the rebate. And the Federal Reserve is “pushing on a string”. Moreover, even if policymakers could rescue the economy it would be a mistake to stop a necessary adjustment in imbalances. Easing policy would only encourage excessive consumption, a big trade and budget deficit and dependence on rising asset prices – and it would extend the “serial asset bubbles”. A good example of the “purge the imbalances” argument was Steve Roach’s piece on this page (January 7).

Are things this bad? It now appears almost certain that about $100bn in tax rebate cheques will be distributed in June, July and August. Clearly a big chunk will be saved, but it is not clear why the consumer will respond differently than in the last rebate of 2001. In our forecast, we assume 50 per cent is spent. If correct, the rebate will boost growth in the second half by 2 percentage points, followed by withdrawal symptoms in the first half of 2009.