I indicated in my commentary entitled The Most Important Week of 2011 released on December the 3rd, that the outcome of the European Summit Meeting would be crucial for investor portfolios. I wrote that the decisions made at that meeting would dictate the action in the global stock markets and commodities for the next few weeks, if not months ahead. Here's exactly what I said regarding that all important meeting:

...the ECB may finally assent to purchasing PIIGS' debt in unlimited quantities and duration. However, if the ECB holds the line on interest rates and refuses to monetize distressed debt the crisis will intensify greatly. In the latter case, bank failures will ensue and European money supply growth rates will plunge. Meanwhile, commodities prices will fall along with equity values across the globe. A deep recession would result from the eventual default of over two trillion Euros in debt.

I believed the odds of the ECB already having reached the conclusion that they would have to monetize trillions of Euros worth of insolvent Eurozone debt were quite high. But Mario Draghi and the rest of his cohorts at the European Central Bank decided they could hold off for the time being on taking such a dramatic step. And the results of his inaction were swift and sure. Gold prices dropped over 10%, from $1,750 down to $1,570 per ounce and the S&P 500 posted this month's first weekly loss. U.S. energy producers dropped 4.9% in just the last week and industrial stocks like Caterpillar and Alcoa tumbled nearly 10%. European stocks as a whole also took it on the chin last week falling nearly 3%.

Unfortunately, this is just the beginning of the decline in global markets. The real problem stems from decades of excess money supply growth, asset price appreciation and debt accumulation in the developed world economies. Therefore, a deflationary depression-which is, in fact, a healthy period of reconciliation--is needed to bring those conditions back to sustainable levels. And so far, Mr. Draghi should be applauded for his efforts to prevent an inflationary collapse of the Euro currency and the European economy. In fact, what would be best for Europe in the long term is an explicit default on the debt. However, my belief is the government and central bank is in the beginning process of defaulting on its debt through implicit default (inflation).

In the case of Europe, unlike our Fed that has the dual mandate of stable prices and maximum employment, their central bank has only one mandate and that is of low inflation. And despite the prevailing wisdom of today, it is that pledge to solely prevent a rapid expansion in the Euro money supply that will, in the long term, save the Euro from the dustbin of history.

Therefore, it does seem logical that the ECB's ability and willingness to monetize debt is slightly more onerous than his counterpart, Ben Bernanke, in the U.S. But the crucial point for investors is that the longer the ECB holds off on massive debt monetization the lower global stocks and commodity prices will fall. The dollar should continue to rise because currency investors just don't know which European country will stay in the Eurozone. It makes a huge difference for the value of the Euro if it continues as EU (17) or a currency that includes just the Northern most solvent nations.

There is little doubt that the end game for Europe and the U.S. will be an implicit default on their debt through massive money printing. And that will eventually lead to gold rising to new highs in all currencies. However, for the time being the U.S. dollar will rise and markets in general will struggle until the ECB acquiesces into entering an all-out inflation mode.

Of course, when such action is eventually taken it will send European interest much higher and GDP much lower than it would otherwise be if Mario Draghi did not rapidly expand the money supply. But it's just, politically speaking, much more palatable-especially for the country's elite--to default through inflation than through a legitimate debt restructuring...in the short term that is.