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Ed Bugos: Gold and the Tragedy of the Commons

May 19, 2010 – Comments (11)

I am a big fan of Ed Bugos and read his stuff whenever I can. I have resposted articles by him in the past (such as http://caps.fool.com/Blogs/ViewPost.aspx?bpid=224047). His stuff is always a good read because of his perspective: not alarmist, always taking the long view.

The whole article is a good one and well worth a read.

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Gold and the Tragedy of the Commons
By: Ed Bugos | Tue, May 18, 2010
http://www.safehaven.com/article/16840/gold-and-the-tragedy-of-the-commons

[excerpt]

"The business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play" - Rothbard

The Greek crisis is but a symptom of the general problem afflicting the world economy. It is still the canary in the coal mine, but EU officials replaced it with a dead parrot when the market wasn't looking.

A week ago today, prompted by fears over a possible default on Greek government debt and stomach churning swings in debt, currency and stock markets all over the world, European officials rolled out a monster 750 billion euro version of TARP, brokered by the IMF which will contribute 1/3.

The world's major central banks chipped in by reopening their (dollar) liquidity swap facilities with the Fed, and the ECB said it would buy corporate and government bonds. However, the ECB also said that it would sterilize these purchases by draining liquidity from elsewhere, and by paying commercial banks to make deposits with it.

Athens Stock Market vs 2-Year Greek Government Yields

The deal stirred a lot of controversy because not only did the German government defy its constituents by hastening the bailout plan through parliament, but also, they did it just before crucial elections. The risky move cost Merkel's government a significant amount of seats in a strategic jurisdiction last week.

This tells us they were motivated by fear.

Fear of what? Fear that the whole thing could snowball into a global nightmare. Fear that the German banks who own the paper would keel over and die. Fear that the European Union could unravel.

Greece won't default; we knew that wouldn't be allowed. That fear is dead, for now.

The other fears live on.

Justifying the move the German government lashed out against speculators calling them "treacherous" parasites who brought on the crisis, and are now biting the very hand that feeds them. Socialist leader Angela Merkel believes the evil market is at war with her government, and needs to be put in its place.

"First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to initiate recovery packages. Because of these packages, we have become indebted and now, they are speculating against these debts; that is really very treacherous... To some degree this is a battle between the politicians and the markets. But I am firmly resolved -- and I think all of my colleagues are too -- to win this battle; Governments must regain their supremacy over the markets, which they no longer have, and for that we need much stricter global rules" - German Chancellor Merkel on Greek crisis.

There you have it: banks did it. Now they are unfairly making it difficult for her government to paper over the whole mess. Is this true? Do markets wage war? Are the banks at fault? Do we just need more regulation to make the bad guys go away? Can the State stimulate growth, or create wealth?

Will the bailout work? How will all this affect the markets?

Read on.....

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