Why speculators are good for us

[Fransisco]

I didn't say <b>EVERYONE</b> else cotton.

Your sloppy writing is symptomatic of, not the cause of your sloppy thinking.

I put out a thoughtful defense of 'speculators' and speculation as presented by Dr Williams. Your reaction was to call him an "a-hole" and a "keynesian", and try to change the subject to currency devaluation. Now you want to talk about "12%"(?!?) inflation.

Whether or not currency devaluation has something to do with the current climb in commodity prices(and I believe it does have something but not everything to do with it) is beside the point.

At least Jensen 'gets' the argument understands it, has a counter argument/contribution to the discussion and actually backs it up with something more than just bluster and name calling.

[Fransisco]

Now back to the topic at hand. I found this on Economic Professor Mark J. Perry's Blog.


<b>The Stabilizing Role of Speculators</b>

1. People who argue that speculation is destabilizing seldom realize that this is largely equivalent to saying that speculators lose money, since speculation can be destabilizing in general only if speculators on the average sell when the currency (commodity) is low in price and buy when it is high.

~Milton Friedman, Essays in Positive Economics (p. 175)

In other words, speculators who continually lose money by buying high and selling low (which would increase volatility and be destabilizing) will be forced to leave the market eventually, and only rational speculators – those who will actually help to stabilize prices – will survive.

2. Speculators anticipate shortages and buy up commodities early, thereby removing them from the market. This alerts consumers to the oncoming shortage, fulfilling the important financial market role of providing information and allowing them to reduce consumption as prices rise. Later, the speculator sells, ameliorating the shortage while making a profit.

Speculators anticipate and warn others about shortages—they do not cause shortages. As a result of their trades, price swings are less severe than they otherwise would have been. We do not blame doctors, police, or firemen for profiting from the misfortune of others because it is understood that they help a bad situation. Speculators deserve the same consideration.

[Fransisco]

Let me reemphasize that last paragraph.

<blockquote>"Speculators anticipate and warn others about shortages—they do not cause shortages. As a result of their trades, price swings are less severe than they otherwise would have been. We do not blame doctors, police, or firemen for profiting from the misfortune of others because it is understood that they help a bad situation. Speculators deserve the same consideration."</blockquote>

[jensend]

there is a difference between a lot of small specs adding liquidity to a market and fund managers moving tens of millions of dollars into a market in a short period of time. read the article and see that traders say the market is not finding value, just serving as a vehicle for large fund managers to relieve actual industry participants of their capital. free enterprise is wonderful but it doesn't exist in many places anymore. wally williams is a fraud.

[cottonpicken]

inflation and currency devaluation are one in the same.

i'll bet you a shiny nickel he is a keynsian.

when the house of economic cards he helped build comes crumbling down,you will understand my distain.

it took 200 years for the us to accumulate its first trillion of debt.

now it is doing it yearly.

when it starts doing it hourly,you'll understand.

[cottonpicken]

one million dollars=a stack of one thousand dollar bills 4 inches high

one trillion dollars=a stack of one thousand dollar bills 64 miles high

[Fransisco]

If Williams is a Keynesian then the Pope must be an atheist.

I have no love for Keynesian economics myself, most of our current problems stem from the implementation of its interventionist theories.

[Fransisco]

And the topic is still speculation and speculators not inflation and or currency devaluation if that's what you want to talk about start another thread.

[cottonpicken]

See fran,we probably have more common ground than you could imagine.

I dont jump into threads i dont know alot about because the doubt fairy visits my brain.

The specs have entered the market for a number of reasons.

The most important are the ones i've talked about thread after thread,year after year.

Thats why i jumped on this thread.

Maybe i'm wrong,maybe i'm right.

Doesnt really matter.

[Fransisco]

jensen said,<blockquote>"...free enterprise is wonderful but it doesn't exist in many places anymore..."</blockquote>

Oh contraire my cynical friend. The surest path to prosperity is free market Capitalism and the world is steadily embracing it more and more each day.

Take a look at this website

http://www.heritage.org/Index/

and the executive summary of their 2008 report.

http://www.heritage.org/research/features/index/chapters/pdf/index2008_execsum.pdf

It is no accident that, "The world’s freest countries have twice the average per capita income of the second quintile of countries and over five times the average income of the fifth quintile." Or that countries that
increase their levels of freedom experience faster growth rates than countries which don't.

Freedom equals prosperity, free markets equal prosperity. The freer the country, the freer the markets, the greater the level of prosperity.

No one has yet successfully figured out how to regulate themselves into prosperity. Though countries like Zimbabwe and Venezuela are still giving it the the old college(Marxist)try.

While party poopers such as yourself and your pals at the Globe and Mail keep trying to show us that markets don't work the evidence clearly shows that they do. The run up in the price of wheat and rice the last couple of months for example, what happened because of that? A record number of acres got planted. The market gave the signal, and farmers responded. Would they have responded as much without the hedge funds participating? No they wouldn't have.

So while the chicken little/fascists at the globe are getting their jackboots on, looking for a scapegoat and hysterically talking about how "This could have catastrophic economic effects on millions of already stressed U.S. consumers. It literally could mean starvation for millions of the world's poor." The market, thanks in part to speculators and voluntary trade, is already taking care of the problem.

Voluntary trade, not coercive force(regulation) is always the right answer.

There is a reason why high prices cure high prices, but you have to let them.

And I for one am very happy that there is possibly a hedge fund somewhere willing to take the trade when I sell canola for $14 a bushel like I did last week. It beats a cheque from the government hands down every day of the week.

Williams a fraud? No, he's right on the money.

[Fransisco]

Okay cotton now we're getting somewhere, yes there are various reasons why the funds have gotten into commodities. The question being posed is, is it right or wrong for them to be allowed to trade these markets.

I argue that it is perfectly fine for them to be here, the more money and players in the market the better. jensen I believe is arguing the opposite, that they are too rich and can therefore "control" everything. We can't have private interests "controlling" everything someone needs to regulate them into submission for the greater good or some other nonsense like that.

I don't buy that argument, no one fund is that rich and no regulator is smarter or better at allocating resources than the market.

[GrainBeetle]

Score:

Cotton: 4, Fransico 0

[Fransisco]

Really GrainBeetle?

Okay, can you explain to us then how cotton proved that Walter Williams is a Keynesian economist?

Or how currency devaluation shows that it is right or wrong for index funds to speculate in the commodity markets?

Or that Cottons Socrates quote is correct? And if it is how does that have any bearing on allowing speculators into a market?

Or that inflation is actually running at 12% using the standard measurements? And again what bearing does that have in allowing speculators into the market.

Hmm...

...No?

Oh wait a minute, let me guess, you're using the same methodology that tells you the CWB gets you premiums while actually you're getting hosed.

[Fransisco]

Some excerpts from the latest edition of the Economist on the subject related to oil.

http://www.economist.com/opinion/displayStory.cfm?Story_ID=11454989


...It is clear that high oil prices are hurting many economies—especially in the rich world. Goldman Sachs reckons consumers are handing over $1.8 trillion a year to oil producers. The wage-price spiral of the 1970s has been avoided, but the income shock is painful. Beset by scarce credit, falling asset prices and costly food, developed-country households are hardly well-equipped to foot the oil bill. America's emergency tax rebate, voted this year to help people cope with the credit crunch, has in effect been taken right away again.

Stuck for answers, <b>politicians have been looking for scapegoats. Top of the list are the speculators</b> profiting from other people's hardship. Some $260 billion is invested in commodity funds, 20 times the level of 2003. Surely all that hot money has supercharged the demand for oil? <b>But that is plain wrong.</b> Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of “paper barrels”, but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.

If the speculators are not to blame, what about the oil companies, which have failed to increase output in spite of record profits? Profiteering, say some. However, that accusation doesn't stand up to much scrutiny either. The oil price is set in a market. For Shell, Exxon et al to hoard oil underground would be to leave billions of dollars of investment languishing unused. Others fear that<b> oil is pricey because it is running out.</b> But there is little evidence to support the doctrine of “peak oil” in its extreme form. The Middle East still seems to contain a sea of the stuff. Even if new finds elsewhere have been rarer and less accessible than in the past, vast quantities of oil could now be profitably stripped from tar sands and shale.

The truth is more prosaic. Finding and developing new oil fields is an expensive and time-consuming business. The giant new fields in the deep water off Brazil are unlikely to produce oil for a decade or more. Furthermore, oil is perverse. <b>When prices are low, oil-rich countries welcome the low-cost, high-tech and well-capitalised oil firms. When prices are high, countries like Russia and Venezuela kick them out again.</b> Likewise the engineers, survey ships and seismic rigs that oil firms need to find and produce new deposits are expensive right now. The costs of finding oil have, temporarily, doubled precisely because everybody wants to give them work...


...governments should speed up the adjustment—or at least stop delaying it. <b>Half the world's people are sheltered from fuel prices by subsidies—which, perversely, have boosted demand</b> and mostly benefited the better off. Now countries like Indonesia, Taiwan and Sri Lanka have begun to realise that they can ill afford this. Cutting fuel taxes in the rich world makes no sense either (see article). There are better ways to return cash to struggling voters.

[FarmRanger]

From the article that jensend referenced:
Quote
“The modern-day commodities market was born in 1848, when 82 merchants banded together to create the Chicago Board of Trade. Until that point, the grain trade was unpredictable, at best, and utter chaos, at worse.

Buying did not take place in any organized fashion, and individual farmers tended to transact with separate parties, leading to wide discrepancies in pricing. Because farmers typically sold their wares after harvest, the glut of grain often resulted in low prices.”
Endquote.

Having speculators involved in a market adds liquidity and keeps it honest. This has everything to do with supply and demand and transparency and liquidity. Only the large players who could set prices in the absence of functioning markets would argue against allowing speculators into the markets. Francisco is quite correct in explaining a speculators function in any economy, regardless of whether they have fiat currencies.