- When you're driving too fast for safety, you slow down.
- When deficits rise, you cut spending and/or raise taxes.
- When someone is kind to you, you express your appreciation.
- When an investment is no longer attractive, you sell it.
- When inflation rises, you raise interest rates or tighten fiscal policy.
- When bread is cooked you take it out of the oven.
- When you cannot afford a discretionary purchase, you don't buy it.
- When representatives govern poorly, you don't re-elect them, or their party.
- When your political system ceases to function properly, carefully consider what is broken, and fix it.
- When you have reasonable evidence that leveraged commodity speculation and physical hoarding by financial and policy investors is materially impacting prices and adversely affecting the Public Interest you should begin to react by RAISING INITIAL AND MARGIN REQUIREMENTS!! (oh and you might consider closing the loopholes that allow specs to obtain hedge margins and slap a "Tobin" tax upon transactions.It also might be worth exploring some cross-border harmonization too)
Mostly original content that examines financial surreality in equity markets in general, and the Japanese Stock Market in particular.
Now all we need is an adult on the playground. It's definitely time to chop the head off of this snake.
ReplyDeleteNice post,
ReplyDeleteBut the snake is the system.
They want to starve to death a couple of billions to restore confidence in the system.
A little late for Tobin taxes in this rotten world.
koteli
Speculation in commodities is only a symptom. Devaluation of the dollar is the cause.
ReplyDeleteCassandra: with small specs net shrt might that not work the other way around?
ReplyDeletegold and silver margins have been raised a few weeks ago. last week the cftf raised crude margins 10% and what did it do? nothing. As you say, if the ICE doesnt follow, smart specs just move their business there..
ReplyDeleteAssuming that the crude oil price rally is due to speculation then why Platt's dated brent which to my knowledge is the best proxy for the spot market goes 1:1 with Brent futures ? Shouldn't we witness a contago situation?
ReplyDeleteJim
Southwest Airlines is one of the few airlines hedging their fuel costs. They are able to hedge only a portion. The reason they aren't hedging all of their fuel costs (and why most airlines hedge little or not at all) is because of high margin requirements that take up too much cash flow.
ReplyDeleteMargin requirements on oil have almost doubled since last fall. Margins are reset reqularly as the price of the commodity goes up.
Recent CFTC studies, as well as academic studies ranging back 20 years, have consistently shown that neither speculators nor herding behavior are responsible for commodity price rises: http://www.cftc.gov/stellent/groups/public/@newsroom/documents/speechandtestimony/opaharris040308.pdf
And it's a bad idea to raise interest rates unless inflation is caused by excess money supply. When inflation is caused by something like an inefficient use of available energy supply, you need a functioning economy to make the expensive investments necessary to make the economy more energy efficient.
All raising interest rates would do is charge the energy inefficiency to the people at the bottom, without addressing the energy inefficiency throughout the economy. You'd screw over the most vulnerable people to preserve the bad behavior of the rest. That would be sick.
Moe Gamble
Moe,
ReplyDeleteAsking the CFTC to study the impact of speculators on futures markets is a bit like asking Exxon to study global warming.
Virtually any statistical study would be worthless since the "Commodities as an Asset Class" paradigm and the Ibbotson "You Gotta Have Oil " are very recent phenoms.
I agree that raising interest rates is not a formulaic response to inflation, though to be fair I did suggest either/or with fiscal tightening, and any event it wasn't the point of the post except to provide foil for the final point (which you still have every right to disagree with).
I am also uncertain as to your last point. As you might be aware, I've long been an advocate of whack-em regressive energy taxes (especially back from the days of cheap oil), not because I enjoy hammering the poor - for I am in reasonably left politically in favoring progressive taxation for broadly redistributive agendas, but because the less-well off are the majority, and the majority must change energy consumption behaviour until the advent of cold-nuclear fusion or Craig Ventner's bio-engineered fuel becomes reality, and the only thing an individualistic nation like Americans understand is the Price Mechanism. This is what motivates producers and consumers alike to consider the impact of energy use and the investment into alternatives. Ideally, the State would give it back to them via health coverage, better public transport, and greater economic stability and lower rates that should result from an economy in greater balance with respect to its sustainable use of resources and its ability to pay for those resources. America has chosen the route of penny-wise pound-foolishness in pursuing short-term consumption in lieu of long-term investment. THAT must be changed, but it is inherently painful and there is no alternate non-fairy-god-mother route. It probably cost the EC 1% a year in GDP growth, bu the the resulting benefits are now in plain view, both presently and going forward.
Interestingly, the case for increasing reserve/margin requirements is based on "leveraged commodity speculation" having negative price impacts and adversely affecting the public interest.
ReplyDeleteLeveraged with what?
Some people say too much money.
I say too much debt.
Unless you mean one-hundred percent reserve/margin requirements, you're just easing a bit the twist of the knife in the backs of US taxpayers.
Eliminate speculation with so-called borrowed money, which is debt created to feed the economically unproductive habits of financial services specialists: a.k.a. traders.
No leveraging.
Let speculators use their own money.
Let them bet against each other, rather than the American taxpayer.
See how far out they go.
And, how high.
Just a suggestion.
joebhed
Just in case you didn't see this item, it's worth a look-
ReplyDeletehttp://hsgac.senate.gov/public/_files/052008Masters.pdf