Monday, June 18, 2012

Hussman Weekly Market Comment: A Brief Primer on the European Crisis

So the idea of a quick fix through ECB printing is an illusion - that solution would still effectively represent a massive fiscal transfer from other European countries, because the creation of new euros would otherwise be able to fund new spending within the Euro zone. Massive, permanent money creation might "save the euro" in its present form, but would also wreck the euro in substance through inflation and depreciation. The political decision is whether the people of Germany and stronger European countries want the euro enough to make permanent fiscal transfers (or permanent currency creation that amounts to the same thing) to peripheral European countries. The real fate of the euro rests with that political decision, not with central banks, and the final decision on that matter will not come without extreme disruption in any event. Maintaining the Euro will require European governments to cede their fiscal sovereignty to a central authority, and that will not be easy unless major disruptions make that choice better than the alternatives. Departing from the Euro would best be done in sequence from stronger-to-weaker (which would free the remaining countries to agree on whatever depreciation and inflation rate they choose), rather than weaker countries first, but any breakup path would be disruptive as well. The realistic perspective here is to accept the likelihood of significant and continuing disruptions from Europe, and to accept various investment risks within that context.