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If you are going to explain a system-wide phenomena, you need a systemic explanation. Gas isn't expensive today. What's expensive today are almost all commodit

by miked 16y ago

If you are going to explain a system-wide phenomena, you need a systemic explanation. Gas isn't expensive today. What's expensive today are almost all commodities. http://www.indexmundi.com/commodities/ http://www.indexmundi.com/commodities/ This is a systemic problem. Any valid explanation of price increases in a commodity, e.g., oil (gas), has to explain why prices are rising almost across the board. Global commodity price increases are being driven by two main factors. The first is rapidly rising standards of living in the developing world as many nations, especially China and East Asian countries, have freed up their markets. This has caused a dramatic rise in living standards and a huge decrease in the number of people living in poverty. These people are now buying the things that we in developed take for granted, and that is driving the prices of copper for cars and new homes, steel for buildings, oil for transport, corn for livestock feed, etc. The other systemic factor is massive currency inflation in almost all OECD coountries. When inflation happens in more normal circumstances, an inflating country's money falls in price relative to those of other countries, and it's easy to see which countries are destroying their currency and which aren't. People sell the increasingly worthless currency and buy the strong ones. What we have today is almost all OECD countries inflating their currencies at once in a (failed) effort to boost their economies. This means that anyone who wants to protect their wealth needs to invest in something that will rise at least as fast as inflation. That means commodities. BTW: If speculators can somehow control prices in a way largely independent of constraints, then why aren't they always doing it? It's not like human beings just started getting greedy last year. And why have, for instance, prices of natural gas fallen thru the floor (hint: greatly increased supply due to drilling breakthroughs)? Where are the all-powerful speculators on that?

jsmcgd 16y ago
The article states that the regulation changes that allowed unlimited commodity speculation only started in 1991 and then only for 16 institutions who were given exemption.
jeromec 16y ago
Gas isn't expensive today. What's expensive today are almost all commodities. http://www.indexmundi.com/commodities/ http://www.indexmundi.com/commodities/ This is a systemic problem. Any valid explanation of price increases in a commodity, e.g., oil (gas), has to explain why prices are rising almost across the board. This is almost exactly the point the article is trying to explain: commodity prices are rising across the board in line with the commodities index, but why should there be an index at all? In the market you have the supplier, buyer, and consumer. The "speculator" was placed into the mix with a limited role for providing liquidity; this role was intentional and helpful since in the real world there could be a delay between the time a grower/supplier and buyer/cereal producer actually needed what the other had (raw material or cash); with the speculator there was always the opportunity to buy or sell. However, there were intentional, specific limits placed on the speculator. This was to ensure he couldn't corner the market and artificially skew prices. As long as these limits remained intact the market operated as designed, and the actual price of commodities reflected real world supply and demand (since the main players in the market were physical hedgers - people who actually had stake in/cared about the physical commodity). Goldman Sachs was able to get these "speculator handcuffs" removed. This means the actual market price for commodities doesn't necessarily reflect supply and demand. Rather, it also has the component of speculation priced into it. We can see this even within these last few days. The price of a barrel of oil was skyrocketing above $100; this seemed to make sense due to the unrest in the Middle East, then amazingly with the earthquake in Japan it quickly dropped below $100. In such as short time was there really an escalation then de-escalation in the demand for oil!? Of course not. The price was following speculation, people who are only in the market to make money. The end result is that ordinary consumers must pay at the pump what the whims of investors say, never mind progress made whether politically or technologically, or reductions by consumers in a recession to ease pressure on demand and oil prices. Natural gas is not as attractive to speculators as oil.
- fauigerzigerk 16y ago
  Don't forget that speculation works both ways. It can also bring down prices very quickly and consumers benefit from that. What speculation really does, in my view, is to insert a component of future expectations in addition to the current supply and demand effects. It is not entirely clear to me that adding this expectations component is always bad. It can get out of control when it becomes self feeding, but it can also convey valuable information that allows us to react early to fundamental supply and demand issues. We clearly have fundamental supply issues in crude oil and in agricultural products. The blog post is totally wrong on that one. Pointing to falling US demand of crude oil makes no sense in a world where the marginal buyer is in Asia.
  - jeromec 16y ago
    Don't forget that speculation works both ways. It can also bring down prices very quickly and consumers benefit from that. That's like me expecting you to say "thanks" for returning an item I took from you when it's speculation which helped drive up prices in the first place. What speculation really does, in my view, is to insert a component of future expectations in addition to the current supply and demand effects. That's exactly what it does. Why do we need that? It is not entirely clear to me that adding this expectations component is always bad. It can get out of control when it becomes self feeding, but it can also convey valuable information that allows us to react early to fundamental supply and demand issues. React early and do what? This isn't like hurricane preparedness. Again, the point the article is trying to convey is that prices don't reflect supply and demand. We experience sky rocketing gas prices but no longer see gas shortage or rationing lines. In 2008 we had significantly more people go hungry from food shortages, although nothing has changed about wheat farming except, if anything, farmers producing it more efficiently. The wheat harvest that year was the most bountiful the world had ever seen.
    - fauigerzigerk 16y ago
      I think we need a component of future expectations in prices because it increases incentives and provides funding for averting real future shortages.
oahassan 16y ago
I agree that speculation isn't the sole cause of the price increase in oil since there are other buyers besides speculators and the post's long quote from Matt Taibbi’s Griftopia acknowledges this. The quote gives facts to show the increase in speculative demand for oil was more or less equal to the increase in China's demand. If China makes up a substantial amount of the change in demand that drives up the price of oil then speculation does as well. I agree with you about the effect of inflation and the post only covers 15 foods and oil in detail so an argument that speculation is the sole cause of price increases would be false. An argument that speculation is a driver in the prices of all commodities would be an extrapolation that requires more evidence. However, breakthroughs in drilling for natural gas gives a reason for natural gas to be an exception, not for all commodities to be devoid of speculation's influence.

by miked 16y ago

jsmcgd 16y ago

The article states that the regulation changes that allowed unlimited commodity speculation only started in 1991 and then only for 16 institutions who were given exemption.

jeromec 16y ago

Gas isn't expensive today. What's expensive today are almost all commodities. http://www.indexmundi.com/commodities/ http://www.indexmundi.com/commodities/ This is a systemic problem. Any valid explanation of price increases in a commodity, e.g., oil (gas), has to explain why prices are rising almost across the board. This is almost exactly the point the article is trying to explain: commodity prices are rising across the board in line with the commodities index, but why should there be an index at all? In the market you have the supplier, buyer, and consumer. The "speculator" was placed into the mix with a limited role for providing liquidity; this role was intentional and helpful since in the real world there could be a delay between the time a grower/supplier and buyer/cereal producer actually needed what the other had (raw material or cash); with the speculator there was always the opportunity to buy or sell. However, there were intentional, specific limits placed on the speculator. This was to ensure he couldn't corner the market and artificially skew prices. As long as these limits remained intact the market operated as designed, and the actual price of commodities reflected real world supply and demand (since the main players in the market were physical hedgers - people who actually had stake in/cared about the physical commodity). Goldman Sachs was able to get these "speculator handcuffs" removed. This means the actual market price for commodities doesn't necessarily reflect supply and demand. Rather, it also has the component of speculation priced into it. We can see this even within these last few days. The price of a barrel of oil was skyrocketing above $100; this seemed to make sense due to the unrest in the Middle East, then amazingly with the earthquake in Japan it quickly dropped below $100. In such as short time was there really an escalation then de-escalation in the demand for oil!? Of course not. The price was following speculation, people who are only in the market to make money. The end result is that ordinary consumers must pay at the pump what the whims of investors say, never mind progress made whether politically or technologically, or reductions by consumers in a recession to ease pressure on demand and oil prices. Natural gas is not as attractive to speculators as oil.

fauigerzigerk 16y ago
Don't forget that speculation works both ways. It can also bring down prices very quickly and consumers benefit from that. What speculation really does, in my view, is to insert a component of future expectations in addition to the current supply and demand effects. It is not entirely clear to me that adding this expectations component is always bad. It can get out of control when it becomes self feeding, but it can also convey valuable information that allows us to react early to fundamental supply and demand issues. We clearly have fundamental supply issues in crude oil and in agricultural products. The blog post is totally wrong on that one. Pointing to falling US demand of crude oil makes no sense in a world where the marginal buyer is in Asia.
- jeromec 16y ago
  Don't forget that speculation works both ways. It can also bring down prices very quickly and consumers benefit from that. That's like me expecting you to say "thanks" for returning an item I took from you when it's speculation which helped drive up prices in the first place. What speculation really does, in my view, is to insert a component of future expectations in addition to the current supply and demand effects. That's exactly what it does. Why do we need that? It is not entirely clear to me that adding this expectations component is always bad. It can get out of control when it becomes self feeding, but it can also convey valuable information that allows us to react early to fundamental supply and demand issues. React early and do what? This isn't like hurricane preparedness. Again, the point the article is trying to convey is that prices don't reflect supply and demand. We experience sky rocketing gas prices but no longer see gas shortage or rationing lines. In 2008 we had significantly more people go hungry from food shortages, although nothing has changed about wheat farming except, if anything, farmers producing it more efficiently. The wheat harvest that year was the most bountiful the world had ever seen.
  - fauigerzigerk 16y ago
    I think we need a component of future expectations in prices because it increases incentives and provides funding for averting real future shortages.

oahassan 16y ago

I agree that speculation isn't the sole cause of the price increase in oil since there are other buyers besides speculators and the post's long quote from Matt Taibbi’s Griftopia acknowledges this. The quote gives facts to show the increase in speculative demand for oil was more or less equal to the increase in China's demand. If China makes up a substantial amount of the change in demand that drives up the price of oil then speculation does as well. I agree with you about the effect of inflation and the post only covers 15 foods and oil in detail so an argument that speculation is the sole cause of price increases would be false. An argument that speculation is a driver in the prices of all commodities would be an extrapolation that requires more evidence. However, breakthroughs in drilling for natural gas gives a reason for natural gas to be an exception, not for all commodities to be devoid of speculation's influence.