This system functioned more or less perfectly for about fifty years. It was tightly regulated by the government, which recognized that the influence of speculators had to be watched carefully. If speculators were allowed to buy up the whole corn crop, or even a big percentage of it, for instance, they could easily manipulate the price. So the government set up position limits, which guaranteed that at any given moment, the trading on the commodities markets would be dominated by the physical hedgers, with the speculators playing a purely functional role in the margins to keep things running smoothly...Speculation is simply a tool for the wealthy to create money without working. When unchecked, it's absolutely disastrous for an economy, because it exposes it to booms and busts that are exacerbated by irrational market speculation instead of the actual market.
...in 1991... the Goldman subsidiary wrote to the Commodity Futures Trading Commission (the government agency overseeing this market) and asked for one measly exception to the rules.
The whole definition of physical hedgers was needlessly restrictive, J. Aron argued. Sure, a corn farmer who bought futures contracts to hedge the risk of a glut in corn prices had a legitimate reason to be hedging his bets. After all, being a farmer was risky! Anything could happen to a farmer, what with nature being involved and all!
Everyone who grew any kind of crop was taking a risk, and it was only right and natural that the government should allow these good people to buy futures contracts to offset that risk.
But what about people on Wall Street? Were not they, too, like farmers, in the sense that they were taking a risk, exposing themselves to the whims of economic nature? After all, a speculator who bought up corn also had risk—investment risk. So, Goldman’s subsidiary argued, why not allow the poor speculator to escape those cruel position limits and be allowed to make transactions in unlimited amounts? Why even call him a speculator at all? Couldn’t J. Aron call itself a physical hedger too? After all, it was taking real risk—just like a farmer!
On October 18, 1991, the CFTC-in the person of Laurie Ferber, an appointee of the first President Bush—agreed with J. Aron’s letter. Ferber wrote that she understood that Aron was asking that its speculative activity be recognized as “bona fide hedging”—and, after a lot of jargon and legalese, she accepted that argument. This was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators in the energy markets.
In the years that followed, the CFTC would quietly issue sixteen similar letters to other companies. Now speculators were free to take over the commodities market. By 2008, fully 80 percent of the activity on the commodity exchanges was speculative, according to one congressional staffer who studied the numbers—”and that’s being conservative,” he said.
Demand is how much of a given product is wanted by buyers who actually desire to use the product, not speculators who are betting on if the price will go up or down. If they were the same thing, they wouldn't have different names.Speculators are a subset of buyers. Just like how humans are a subset of animals. They are paying money for the stuff, or an option to buy the stuff in the future, or whatever.
Where I live, a small house in the city, the type you're describing, is double the price of the two-storey, split-entry cookie cutters that are being built up in the sprawl areas. If you've 200k to spend on a house, you can't afford the city or a custom small build (as the land is all owned by developers, unless you sprawl waaaaay out) so you end up in a house that you know is too big for you and you end up commuting, rather than walk like you'd prefer.And why is it that inner-city houses are so much more expensive then sprawlsville? It's because the economic benefits of living in town make inner-city housing that much more valuable. The price differential is likely to increase along with gas prices.
You're not sure because you haven't looked. It's always been the case that SUVs and Trucks are more dangerous then smaller cars, because they're more likely to tip over and crush you.They're more nimble and easier to stop than larger cars (making them actually safer than large vehicles because you can AVOID accidents rather than try to SURVIVE them)I'm not sure the stats actually back you up on this.
Here's what's happening: The US Fed announced a few months ago that they will be printing money to fix the American economy. Investors around the world are worried that this will cause inflation and ruin their (enormous) holdings of treasury bonds so everyone and their advisor are buying gold and commodities futures right now.Oh god. People have been saying that every single fucking day since the crash. The fed is printing money, it's going to destroy the economy, bla bla bla. It never stops. No mater what happens in the world, everything that happens is the result of the fed printing money. I am so sick of it. As per Krugmans article, commodity prices are not rising at the same rate as Oil. Just oil is going up. And if you haven't noticed, there's a huge fucking civil war going on in one of the major oil producing nations! And on top of that, the world is running out of oil more generally.
As you can see, even in a rural area, there's plenty of people that aren't farmers and that certainly don't benefit directly from farm subsidiesNot directly. But farm subsidies pump tens of billions of dollars into those economies, and then of course those people run out and vote for 'anti-government' types who rail about welfare for people in cities. And now you're saying we should give them more free money!? How much is enough?
Just a note in the debate over speculators versus fundamentals: oil is a commodity with highly inelastic short-run demand; this means that any shortfall in supply leads to a large rise in the price. Supply from most sources is also highly inelastic; the exception used to be Saudi Arabia.Just because a journalist says something, does not make it true.
So Jim Hamilton makes the needed point: there’s a real possibility that Libyan supply, which is a significant chunk, will be taken off the market — and there are real questions about whether the Saudis can or will fill the gap.
As I see it, the surprising thing is that prices aren’t even higher.
Evidently, you haven't heard of the Democratic Farmer-Labor Party of Minnesota. Plenty of rural dwellers (including my family) support liberal policies.There are certainly people who are both rural and liberal, but the are the minority.
There's a lot of people out there, and cities aren't the only organization that has a right to survive.Well, that's just it though, if a lifestyle requires subsidies from other people, does it really have a 'right' to exist? If these people require oil to be pumped in in order to live, the question is why should we pay for it? If oil stopped flowing, the might be able to make enough bio-diesel to drive themselves around, but for now there isn't even an incentive to do that.
On October 18, 1991, the CFTC-in the person of Laurie Ferber, an appointee of the first President Bush—agreed with J. Aron's letter. Ferber wrote that she understood that Aron was asking that its speculative activity be recognized as "bona fide hedging"—and, after a lot of jargon and legalese, she accepted that argument. This was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators in the energy markets.I'm going to assume, Ironmouth, that you asked this question in good faith. As you can see, the answer I've provided comes from Griftopia. I copied the excerpt I used from my copy, but the same excerpt is in the fpp linked article.
In the years that followed, the CFTC would quietly issue sixteen similar letters to other companies. Now speculators were free to take over the commodities market. By 2008, fully 80 percent of the activity on the commodity exchanges was speculative, according to one congressional staffer who studied the numbers—"and that's being conservative," he said.
Due to bad weather. Krugman also had a post on that. Basically bad weather (caused by global warming) has resulted in a lower supply of wheat.
Really? wheat is on track to double in price this year over last
Up until about mid-2007, oil prices were mostly about fundamentals: the ever-tightening supply situation that we have chronicled on these pages week after week, terrorist attacks and sabotage of oil facilities and pipelines, geopolitical tensions, and the skyrocketing demand for energy from the world's developing economies.This is an investment advisor, not a Taibbi wannabe. He's talking about the 2008 spike, as was Taibbi in Griftopia and The Great American Bubble Machine.
But in September, the market dynamics changed. The first Fed rate cut in four years on September 18 set off a flight of capital to commodities seeking a relatively liquid safe haven from the devaluation of the dollar. And oil prices began increasing at a far faster rate.
Most pundits were slow to recognize this key factor, and continued to point to Nigeria, OPEC, and so on. Only in recent weeks have I noticed the dollar cited as a primary reason for oil prices. Apparently, setting new record lows session after session got their attention.
The managers of this new product would acquire and hold long positions, and nothing but long positions, on a range of commodities futures. They would not hedge their futures with the actual sale or purchase of real wheat (like a bona-fide hedger), nor would they cover their positions by buying low and selling high (in the grand old fashion of commodities speculators). In fact, the structure of commodity index funds ran counter to our normal understanding of economic theory, requiring that index-fund managers not buy low and sell high but buy at any price and keep buying at any price.From Taibbi:
The other problem with index investing is that it’s “long only.” In the stock market, there are people betting both for and against stocks. But in commodities, nobody invests in prices going down. “Index speculators lean only in one direction-long—and they lean with all their might,” says Masters. Meaning they push prices only in one direction: up.Argue with them.
In the stock market, there are people betting both for and against stocks. But in commodities, nobody invests in prices going down. “Index speculators lean only in one direction-long—and they lean with all their might,” says Masters.Notice that he's here conflating "index investors" with "everybody," i.e. "nobody invests in [commodity] prices going down." Since that's clearly a mistake, Trochanter claimed that this could be understood by reference to the new kinds of investors, "pension funds and such" who are constitutionally committed to long positions. I guessed that he was thinking that pension funds and other institutional investors like sovereign wealth funds have very long time horizons, so they'd only want prices to go up, or something.
But Goldman had its own way to offset the risks of commodities trading—if not for their clients, then at least for themselves. The strategy, standard practice for most index funds, relied on “replication,” which meant that for every dollar a client invested in the index fund, Goldman would buy a dollar’s worth of the underlying commodities futures (minus management fees). Of course, in order to purchase commodities futures, the bankers had only to make a “good-faith deposit” of something like 5 percent. Which meant that they could stash the other 95 percent of their investors’ money in a pool of Treasury bills, or some other equally innocuous financial cranny, which they could subsequently leverage into ever greater amounts of capital to utilize to their own ends, whatever they might be. If the price of wheat went up, Goldman made money. And if the price of wheat fell, Goldman still made money—not only from management fees, but from the profits the bank pulled down by investing 95 percent of its clients’ money in less risky ventures. Goldman even made money from the roll into each new long contract, every instance of which required clients to pay a new set of transaction costs.As the operator of the fund what's your incentive to be cautious on the part of your client? Your client goes bust? Who cares! You dump J. Aron and you're off to your next scam.
The bankers had figured out how to extract profit from the commodities market without taking on any of the risks they themselves had introduced by flooding that same market with long orders.
You think the managers at CALPERS treat the money they invest like this? Trustees have a fiduciary duty to the fund.Lol. Because obviously no one ever makes mistakes or acts in a corrupt or naive way when they have a fiduciary duty.
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posted by furiousxgeorge at 2:18 PM on March 12, 2011