John Rapley, Contributor

At the recent annual Davos junket, an apparent division of opinion emerged between economists and members of the world's financial community. Economists were saying that the good times could not last. The bankers were saying that they were here to stay.

The academics, whose inclinations leaned towards the macroeconomic, were looking at the big picture and concluding that the world was awash with money. Too much money chasing too few goods and services would inevitably drive up prices. This, in turn, would drive up interest rates, which are currently at historic lows. And once interest rates rose, the value of assets - from real estate to stocks - would fall. It mightn't mean a global recession; but it could mean a correction in asset markets.

The bankers, on the other hand, were more concerned with microeconomic trends. In their assessment, the continued rise of China is filling the world with money.

Chinese miracle

It is this economic success story which is driving global demand. And since the Chinese miracle shows no signs of ending anytime soon, they reckon the money will keep on rolling into financial markets.

Roughly, very roughly, one could say that the opinions of the economists coincide with those of central bankers around the world. And those of the investors at Davos coincide with the opinions of the world's private bankers. And the two seem now to be locked in a struggle.

Central banks around the world appear to share a rising concern that the world economy is beset with excess liquidity. Unless inflation is reined in, economies will overheat. And overheating economies are prone to eventual collapse: what goes up, must come down, and the higher and faster it goes, the proportionately more painful the adjustment will be.

Interest rates

Eager to 'smooth out' business cycles, central banks in the major world economies have thus been raising interest rates of late. But so far, their private counterparts have yet to get the message. Apparently confident that inflation is not going to be a problem, investors around the world have driven interest rates ever lower. And this has fuelled the real-estate and stock market booms which have begun to worry central bankers.

In places like the United States, there has resulted a so-called inverted yield curve. This is an unusual situation in which short-term rates are higher than long-term ones. Normally, an inverted yield curve is seen as a harbinger of recession. Private bankers have been suggesting that they are instead a vote of non-confidence in central banks, which have misjudged the threat of inflation.

Part of the problem for the central bankers is that they hold less weight in the world economy than they once did. The liberalisation and globalisation of financial markets has created a sea of money which lies beyond the control of central banks. As a result, their actions exert less influence on investors than they once did.

However, as the Davos conference drew to a close, one development far away seemed to suggest that central bankers may yet win this tug-of-war. When China produced figures suggesting that its economy was not responding to government efforts to rein in its growth rate, the warnings of central bankers seemed to get vindication. Inflation, it appeared, was indeed still a risk.

Across the world, interest rates began trending upwards in private financial markets.

The central banks may yet have their way. Their efforts to mop up what they see as excess liquidity may finally begin to have an impact. If they do, it could mean that the years of cheap money has come to an end, for all of us.

John Rapley is a senior lecturer in the Department of Government, UWI, Mona.