The problem now, though, is not so much the abandonment of the old consensus but, rather, the adjustment to a new one. The sub-prime shock has thrown so many issues up in the air that no one, yet, knows quite how they will eventually fall to the ground.
Earlier in the year, economic life seemed so straightforward. Growth around the world was buoyant. Inflationary pressures were building. Excess liquidity – however defined – was a major worry. The vast majority of central banks were planning on raising interest rates.
Over the past few weeks, though, this consensus has completely broken down. Investors don't know what to think. Should they still be worried about inflation? Or, instead, should they fret about a sub-prime-induced recession? Should they regard the Federal Reserve's recent interest-rate cuts as temporary aberrations, with rates likely to rise again next year? Or are we on the verge of a sustained period of interest-rate reductions in the US, the UK and elsewhere?
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