Theory of Central Banking Rapidly Falling Apart

Friday, May 14, 2010
By Paul Martin

By: Mike Shedlock
Market Oracle
May 14, 2010

Central banks are about to learn the global economy is not Alice’s Restaurant.

In case you don’t know the tune, here is the crucial line: “You can get anything you want at Alice’s Restaurant”

Anything you want, seems to be the attitude of central banks. The problem is, it is virtually impossible for every central bank to get what it wants at the same time, when they all want the same thing, cheaper currency relative to each other to stimulate jobs and exports.

Here are a few examples to help explain what I mean.

UK at Mercy of Demand in EU

Please consider U.K. Trade Deficit Widened in March on Import Jump

The U.K. trade deficit widened in March as imports jumped the most in six months, led by demand for goods from cars to engineering equipment.

The Bank of England is counting on a weak pound to boost exports and support economic growth it helped manufacturing jump the most since 2002 last month. The sovereign debt crisis in Europe has darkened the outlook for U.K. exporters at a time when domestic demand may come under pressure from measures to tackle the public finances.

“With a fiscal squeeze looming, and set to have knock-on effects on consumer incomes, we think that the onus is still on the external sector to keep the recovery going,” Vicky Redwood, an economist at Capital Economics Ltd. and a former Bank of England official, said in a note. “Recent events in the euro zone — the U.K.’s biggest trading partner — clearly cast a shadow over the longer-term prospects for U.K. exporters.”

The U.K.’s trade deficit with the European Union widened to 3.4 billion pounds in March, a three-month high, from 2.9 billion pounds in February. Bank of England Governor Mervyn King yesterday cautioned that the U.K. economy remains vulnerable to the fiscal crisis in the euro area, its biggest trading partner.

King said that rebalancing the U.K. economy after the deepest recession on record relied on “a prosperous European economy.”

“We’re seeing a big, big increase in manufacturing,” Alan Clarke, an economist at BNP Paribas in London, said in a phone interview before the report. “It may be that at long last we have an improvement in external demand or are reaping the benefit of a weaker sterling. We’re at the mercy of demand in the euro zone.”

China’s Trade Surplus Shrinks 87%

The Rest…HERE

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