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Schrödinger's Crash

As we watch the market turmoil engulfing global borses, we see a battle between two scenarios. Scenario 1, the euro survives, Scenario 2, the euro collapses; only one of these events can occur in any given time span. Depending on one’s view, equities are either ridiculously undervalued, or, we are about to undergo the worst economic slowdown in over a century. Contagion ensures there is no middle ground.

Whilst the decision by the central banks of England, Europe, Japan and the US have agreed to lend unlimited dollar funds to European Banks to maintain their liquidity, these loans require collateral. Not a commodity European Banks have an unlimited supply of. European banks are now in the position that they do not need to dodge every bullet from the hail that is coming their way; they can perhaps sustain a minor flesh wound and be saved by a transfusion of funds from the collective action of these central banks. (China, despite its fine words and ample supply of dollars, is noticeably absent from this arrangement.)

In Schrödinger's original thought experiment the cat in the bag was actually incidental, the real point was about whether or not a minute amount of radioactive material, also contained in the bag, would, in a given period of time, trigger a Geiger counter - which would release a hammer fracturing  a flask containing hydrocyanic acid, thus poisoning the cat.

Schrödinger's cat was lucky enough to only face one threat that would trigger the fatal event. In today’s market there are so many events that could trigger the euro’s demise. Indeed one could argue that the experiment is not about whether the cat will be exposed to the cyanide, but whether or not the cat can be resuscitated afterwards.

My personal preference for the trigger would be a Greek banking collapse following a traditional run on the bank. If I were a Greek I would not keep my money in a bank where I could be thrice screwed. A Greek default makes no sense without devaluation. Devaluation is only possible by leaving the euro. Overnight my euro bank deposits would be converted into drachma that will be worth substantially less than the euro that preceded them. So why wouldn’t I just take my euros out the bank now? That way I get to exchange them later for the new currency at a far more advantageous rate.

That I would be playing a part in triggering the event that I am trying to protect myself against would bother me not a jot. Not in a world where the same event could be triggered by so many others from the Finnish Finance minister, the IMF, my own politicians, market speculators… the list goes on.

The only possible event that could save the euro would be if all of the members of the Euro Zone could agree, pretty much overnight, to abandon their own fiscal sovereignty. Even if it wouldn’t require an Irish referendum, which it would, it beggars belief that serious analysts and commentators are expecting a universal outbreak of rationality for the common good, the absence of which has led the European experiment to its current parlous state.

And even if Euro zone governments were prepared to fall on their swords for the sake of maintaining the euro, it would not, could not, survive the democratic accounting that such a decision would lead to. President Le Penn is a scary thought, but it is hard to imagine that he would be the most extreme leader that such a collective surrender of fiscal sovereignty would lead to.

Democracy, it should be remembered, has many flaws compensated for by its one and only major virtue, the peaceful transfer of power between otherwise incompatible regimes. When it comes to making fast, efficient decisions, in difficult circumstances - and sticking to them - there are many better forms of government. At least until regime change arrives.

So if you believe that the euro will survive, buy equities; just don’t take money out of a Greek bank to fund the purchase. Otherwise buy gold.

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