Yet again, we hear the cry of the old economic religion: repent before it is too late; the wages of fiscal sin is death. But is it already time to retrench? I doubt it. At least, we must recognise the risks: delayed retrenchment poses the danger of inflation and even default; premature retrenchment threatens recession and even deflation, as I argued last week. Having barely survived the biggest financial meltdown in history, we need to appreciate that these downside risks are serious.

Some argue that the economy is always in equilibrium - that, in the words of Voltaire's Dr Pangloss, everything is for the best in the best of all possible worlds. Others argue, with Andrew Mellon, US secretary of the Treasury under Herbert Hoover, that, after a big credit boom, we should "liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate . . . it will purge the rottenness out of the system."

I am not addressing inhabitants of either of these caves. I am addressing those who recognise that past mistakes have put the world economy into a deep hole and want to escape as quickly as possible. Yet sensible people believe that the biggest danger now is delaying fiscal tightening. They do so for four reasons. First, they fear that the financial markets, having turned on Greece, Portugal and Spain, will soon turn on the UK and even the US; second, they believe that deficits crowd out the private spending needed for recovery; third, they argue that high deficits must lead to inflation; and, finally, they believe fiscal deficits fail to support demand.