It is only a month since the head of the new European Central Bank, Wim Duisenberg, said lower borrowing costs were unnecessary - a message repeated in briefings by other European central bankers. And it is less than two months since the G7 poured cold water on the idea that a round of co-ordinated interest-rate cuts was needed; 54 central banks around the globe have since, coincidentally, cut rates.
These cuts, which include two in Britain, are a welcome enough response to global financial turmoil and the related economic slowdown. It is a relief to know that even the most hawkish of bankers - and they do not come any tougher than the Bundesbank's Hans Tietmeyer - have recognised the need to stabilise the world economy.
But hold on a minute. If even the most reluctant central bankers now admit there is a need to take action, what does that say about the outlook? A great deal seems to be the answer, and it is almost uniformly gloomy. Nowhere on the planet is there unremittingly good economic news; even in the roaring US economy the picture is mixed. While it is true that Alan Greenspan has been cutting US interest rates mainly to prime the world economy, rather than for domestic reasons, his motives are not entirely altruistic. The US cannot remain immune to what's going on elsewhere.
Even more worrying is the possibility that financial markets hold more nasty and destabilising surprises. The Brazil rescue package is on the rocks, with the IMF and G7 committed to defending the indefensible. Given the slightest chance the markets will sink the Brazilian currency with the same gusto as they did the Russian rouble. Other turbulence may lie in store as banks and funds try to unwind earlier loss-making positions before the year-end.
So far, the main Western equity markets have been able to shrug off any setbacks. The extraordinary persistence of the post-war bull market has taught investors that it pays to buy on the dips. What Alan Greenspan described two years ago as irrational exuberance seems to have become eternal exuberance.
What's more, this may be justified. Central banks seem prepared to flood their markets with liquidity for the sake of economic stability. Cheaper money means more expensive financial assets, and that includes equities. Thus even in a recession, when earnings and dividends can be expected to fall, equities are going to be dragged up in value in line with bonds. That, in any case, is the logic of the process. One day the stock market bubble will burst - but not until the bankers feel they can reverse course - or, to put it another way, not until inflation starts to look more likely than deflation once moreReuse content