Something I Didn't Know About America - Did You?

I was reading an article across the weekend about the state of the US economy and the outlook for the rest of the year. During the article a couple of times the term "rebate checks" was used. Every heard of them?

Of course the Septics mean cheques not "checks" but it still got me wondering what are they on about.

Apparently the rebates, which provided up to $600 per taxpayer, $1,200 for couples and $300 per child younger than 16, are the centerpiece of a $168-billion economic stimulus package that President Bush signed in February -- an effort in line with the tax cuts his administration has tirelessly promoted over his eight years in office as the nation's economy has stalled.

The idea being, everyone gets a little windfall and goes out spending, thereby helping the economy.

The reality this year seems to be spending their modest windfalls on bargain-rate clothes, groceries, utility bills, mortgage payments and gas tanks that increasingly seem to verge on empty.

The point being what happens when the money runs out? After all this amount of money isn't a life-changer is it? The outlook doesn't seem great.

According to one Merrill Lynch analyst "Just like consumers, who are insulating their windows and making fewer trips to the malls, we are adjusting our economic forecast to the new high-oil price reality not to mention the latest round of trauma in the mortgage markets. Though fiscal stimulus [rebate checks] will provide a lingering boost to 3Q we expect GDP to plummet 2.5% in 4Q and see a similar decline in 1Q. In all, we have shaved our 2009 GDP forecast to -0.5%, a full percentage point lower that where it was previously, while 2008 is broadly unchanged at 1.5%.

"The scenario we ran last May, when we shocked the model with higher oil prices, now appears to be playing out as predicted. With rebate check delivery winding down, there is now little shielding the consumer from the full force of $4+ gasoline, deflating real estate and equity markets and rising unemployment. The new reality means a deeper downturn for consumers, higher headline inflation, more belt-tightening from businesses and a mammoth profit squeeze. It also keeps the odds squarely in favor of more rate cuts from the Fed, in our view.

"Once the last of the rebate money is spent, in either July or August, consumer spending is expected to roll over, and hard. The oil shock we're experiencing is on par with the spike in the mid-1970s and consumer spending will see a similar downturn, in our view. The unemployment rate will probably crest at about 7.0% in mid-2009, a half percentage point higher than our previous outlook. We're expecting a 3.0% decline in PCE in 4Q 2008 and 1Q 2009 does not promise to be much better.

"The deeply disappointing retail sales report this week only serves to underscore how far behind the curve consumer is financially and a grim foreshadow of what lies ahead once the rebate checks are all spent. Flat spending was all consumers could muster in July with three quarters of the $106 billion total rebate checks in their bank accounts."

So there you go, it doesn't seem like the American patient is going to get better anytime soon. Reeling in on spending will inevitably include a lowering in crude oil consumption.

As recently tax hikes filter through to Indian, Chinese and Malay consumers too it looks like the cure for high oil prices has been high oil prices.

With corn, soybeans and rapeseed all seeming to be inextricably linked to the price of crude, maybe these are all going to go lower if oil continues to fall, no matter what the fundamentals for the grains and oilseeds complex.

For a chart of recent soybeans vs crude price movements click here to see just how closely they are linked (crude is the blue line). Link