They say that breaking up is hard to do.
Now I know, I know that it's true
Don't say that this is the end.
Instead of breaking up
I wish that we were making up again.
– Neil Sedaka, 1962

I have contended for some time that Europe is faced with two choices: Disaster A, which is the break-up of the eurozone, or Disaster B, which is the creation of a fiscal union, which keeps the euro more or less intact. Over the last few months I have come to realize that there is indeed a third option, which now looks increasingly possible. This is rather sad, as the third option is just an even worse Disaster C. Each choice carries with it its own unique set of problems, but the outcome of any of the choices will be that the people of Europe face a serious recession, if not a depression. This will impact global growth for more than a short time and, depending on the choice, could plunge the world into a crisis as bad as or worse than the recent credit crisis. In today’s letter we look at all three choices, meanwhile musing on how we arrived at the bottom of such a deep hole, shovels flailing.

The Seen and the Unseen

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

"There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

"Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."

- From an essay by Frédéric Bastiat in 1850, "That Which Is Seen and That Which Is Unseen"

Europe is again at center stage. At conferences and meetings and in private conversations, it is the topic of the hour. I have thought a lot this week about Europe and its impact, so once again we delve into what is an evolving situation. This time, we look at possible impacts on the markets, as we ponder the questions, “Are we back to 2008?” and “Is there a Lehman in our future?” and I try once again to keep from making this a book-length letter. And I close with some brief thoughts I brought back from DC on the Super Committee and the deficit cuts.

But first, and quickly, I want to say that I am very pleased that Amazon has made Endgame one of their Best Books of the Year for 2011 AND their editors’ pick of “Gift Ideas for a Geeks,” although I am not sure how they define geek (I never thought of myself as smart enough to be a geek). The book has had very good sales of late, which is probably due to the fact that it is out in front explaining the crisis that is being caused by the end of the debt supercycle. Plus, good reviews and favorable mentions from congressional leaders (like Paul Ryan in the New York Times a few weeks ago) have helped.

It makes a good gift for Christmas or for clients! You can get it from Amazon at http://www.amazon.com/Endgame. Now, let’s jump right in to Europe and its own particular Endgame.

This week we return to Europe, as what is happening there is one of the most important questions of the day. It is every bit as critical to our long-term world economic future as the valuation of the Chinese currency or US trade deficits or Fed policy.

Let me set the stage with this note. I am not happy about and take no pleasure in what is happening in Europe. For a variety of reasons, I view it with some concern. A united Europe is simply better for the world at large, even recognizing the problems associated with unity. I recognize the polarities and difficulties. But I had always hoped (and still do), that somewhat like Massachusetts and Texas, or California and Alabama, a political union could emerge.

Today we look at the connections between French farming, China, poor economic forecasting, page 16, single derivative thinking and our investments. We wander and wonder far afield in order to get some insight into our own backyard.

Let's start in the south of France. I was visiting Bill Bonner, of Daily Reckoning fame, last weekend, deep in the heart of Southern French farming country. Riding on the train to his home in Ouzilly with Tiffani (my daughter and assistant), you could see the countryside pass swiftly out the window.

My impression was that French farmers are not so much farmers as they are landscapers. The further from Paris we got, the more the entire landscape seemed to resemble an enormous botanical garden, designed to delight the eye and soul. The fields are neat. The hay is stacked just so. Trees are planted to make the proper visual impact. It is organized. Even the cattle seem to be placed to provide the right ambience.