How Screwed Are We This Week: Even Dead Cats Bounce

02/12/2011 21:57 GMT | Updated 01/02/2012 10:12 GMT

It has been an eventful week in the market, which began the week despondent and ends it on a rare positive note after a combination of extra liquidity, surprisingly good US job numbers and a sniff of decisive action in Europe have seen a rally in stocks start, stagger, then keep on running into the weekend.

On Tuesday, central banks injected liquidity into the world markets by dropping the cost of borrowing dollars, sparking a dramatic revival in developed market indices. The step was taken to stop money supplies from drying up as confidence drained in the eurozone.

Perhaps the best summary, which came via BNY Mellon's Simon Derrick, was that the central banks' action was like pouring foam on a runway - it doesn't stop the crash, but it does reduce the impact when it happens.

Pouring liquidity into the financial system is one way of artificially boosting confidence in markets - the money has to flow somewhere, after all. But rather than fixing anything, it is more like painting over the cracks in a structurally unsound wall. Subsidence is always going to reopen the fissures.

The markets have remained fairly resilient, though, as further good news from the US job market and yet more reassurances from France and Germany added some scaffold. Just how tired investors are of being told that everything will be OK after all by politicians is unclear.

At the very least, policymakers are talking with an unprecedented degree of honesty about the extent of the problem. Mervyn King used words like "spiral" on Thursday, which would have been unthinkable 12 months ago, when leaders were taking the Heisenberg's Uncertainty Principle approach to crisis resolution and hoping that by refusing to acknowledge the existence of a systemic crisis, it would somehow just go away.

In the UK, the Office for Budget Responsibility (OBR) opened the box on Schrodinger's cat in time for the autumn statement. Unfortunately - or fortunately, given that the markets don't like surprises - everyone was well aware of the funny smell. The cat has been dead for a while, as the Bank of England and no end of private forecasters had already said.

George Osborne's growth package - infrastructure, housing, youth jobs and "credit easing" - were all leaked to the market in their nascent form weeks in advance of the "mini-budget", and all of them have a shot at pulling the UK economy off the floor, although how credit is going to be eased when the governor of the Bank of England is telling banks to hold onto capital is yet to be seen.

The rift between governments and central bankers, by the way, is an emerging theme. Mario Draghi, the Italian catapulted into the role of bazooka-wielding pacifist at the head of the European Central Bank (ECB), has been adamant that his job is to control inflation, not to finance governments.

Rumours are still circulating that the ECB could lend money to the International Monetary Fund (IMF), who would then lend the money back to European sovereigns. How this would be materially different from direct intervention is lost somewhere in the intricacies of the eurocracy.

There are a lot of inconsistencies across the eurozone and a lot of sequential events with splintering outcomes. King himself summed it up when he said that the bank could not reasonably be expected to articulate its own response to a possible breakup of the single currency - no one can.

This has been an alarming change in the last couple of months. Previously hubristic and confident commentators are either shutting up or simply shrugging their shoulders and admitting that they have no idea what is going to happen next.

In that context, it is hardly surprising that investors are clinging onto whatever driftwood they can find, buying into liquidity rallies and often pulling back ahead of any big event.

The greatest inconsistency, however, could be the British position. Having spent months criticising the food, David Cameron is still demanding a seat at the table. Treaty change of some form is needed to secure the long term future of the euro - which the UK government has said is the best scenario.

On Friday, Cameron reiterated his calls for the "bazooka" to be deployed as if it were a panacea. It is not.

The UK's exposure to the eurozone is enormous, and its integration with the mainland is deep and important. To demand that the UK gets a say in the solution while simultaneously demanding opt-outs and spooking the public over the idea that a stronger euro-17 led by Germany would cut out British interests borders on the perverse.