by Clive Corcoran
In a nutshell Krugman’s verdict on the fate of the single currency is that it hangs in the balance – he puts it at 50/50 – between a series of bank runs in the peripheral nations of the Eurozone which would lead to a complete disintegration, and a very hard to contemplate climbdown by the Bundesbank and the German government which would open the way for the ECB to backstop all of the sovereign debt of the troubled Eurozone states.
My point with this brief piece is not to opine on which is the more likely scenario, but rather to dwell on the closing comment from the interview in which Krugman makes the point that neither option is acceptable to Germany. In other words the German government and financial establishment are faced with an impossible dilemma.
Increasingly policy makers, not just in Europe, are being faced with a series of options all of which are “unacceptable”. When confronted with such a policy bind there is a natural tendency for those who have to make policy announcements to do their utmost to avoid disambiguating the choices, and continue to prevaricate and play for time.
As long as messages from central bankers and policy makers can remain ambiguous, providing asymmetric information, then the prevailing paradigm of bipolar risk on/risk off asset allocations should enable systemic liquidity to be preserved. Unfortunately, today’s global financial system has become so interconnected, and the returns from most asset classes are so highly-correlated, that investors and asset managers, to a much larger degree than previously, are essentially undiversified and subject to systemic risk. Should market developments and signals become symmetrically disadvantageous then a more substantial systemic crisis than that seen in 2008 is a real possibility.
- Sidestep the Currency Crisis Risk With These Four Stocks (Wall Street Daily, 6/14/12)
- The Collapse of the Euro: The Secret Government Mistake That Could Topple the EU (Money Morning, 5/18/12)
Editor’s note: Clive Corcoran is the author of a new book scheduled to be published in December 2012, “Systemic Liquidity Risk and Bipolar Markets“
About the Author
Clive Corcoran is an FSA registered investment adviser providing private client wealth management services, as well as being an author, financial educator/mentor and an independent trader. He has written “Long/Short Market Dynamics: Trading Strategies for Today’s Markets” (Wiley, 2007) and two textbooks, “Financial Markets, and Portfolio Construction Theory” and “Wealth Management”. He currently is a director of Morphology Management Inc. which has developed a systematic trading platform. Clive has been a regular analyst/contributor to CNBC Europe and other broadcast outlets. Previously he was the founder and CEO of a personal and business management company for entertainment professionals that operated in Los Angeles, London, Munich and Toronto. Clive’s Blog: Morph366.