Wednesday, May 19, 2010

Germans Announce Law to Reverse Cause and Effect - Euro Drops

What if an epidemic of cancer struck, and, in an effort to eradicate the disease, the government's response was to ban x-ray tests that would more quickly detect tumors? Of course, this is insane. But that is exactly what the Europeans have done in banning so-called "naked short selling" of credit default swaps.

Market prices for securities tend to reflect the underlying fundamental value of those securities. Rather than an actual plan to cut government budget deficitis by say, oh, I don't know, STOPPING SPENDING, Europeans have announced the magical creation of $1 trillion of phony money to bail out countries who are broke and can not pay their creditors. Investors have responded by selling eurocurrency and entering transactions to protect themselves from the devaluation of the currency or the default of these governments to pay their contractual obligation. Such activities allow prices to immediately reflect the true value of these instruments. Any effort by government to intervene in these markets only distorts the true value of the underlying securities.

Such actions are equivalent to pretending you don't have cancer by not allowing doctors to perform a test.

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