http://money.msn.com/exchange-traded-fund/latest.aspx?post=1dc008c1-6cac-46aa-8329-16d60718784c&_nwpt=1
I have been doing general reading on libertarianism and austrian economic theory for the past year but there are some aspects of austrian economic theory that escape me. The above article contends that speculation on gas prices is what is truly driving up the price, not actual public demand. The article calls for goverment intervention to ward off speculation and stabilize the price, how would someone who supports a free market rectify this situation? Is there some piece to this puzzle the author has left out?
Discussion started on this exact article here.
Speculators are a normal part of the market, but always seem to get blamed for rising prices. Mostly because people don't understand what a price is.
If speculators are bidding up the price of gas or oil, etc., it's because they expect these things to be worth more in the future. Hend what they're doing is actually smoothing out prices by forcing conservation in the present and pushing some of the current supply into the future. So, instead of going from $3/gallon to say $5/gallon when whatever supply restriction/demand increase they think is coming hits, the price will go up a bit now to say $3.75, then to $4.50 when the event hits. And if it doesn't, they take a bath.
What's normally labelled as 'excessive' speculation is one or a mix of a few things: normal speculation that pisses that particular commentator off because they don't want to pay higher prices and think anyone proximately associated with the cause of the price rise is pure evil on some level; normal speculation that people ignorant of economics call excessive; speculation fueled in part by easy moeny and socialized losses.
In short prices allocate resources in space and time, but you can't change the past, so speculation is just a temporal form of arbitrage that pushes supplies into the future and actually makes prices in the future lower than they would be otherwise given the speculators are correct. And if they're not, they lose money and the supply stays current. And like all market activites, speculation can be affected by an influx of new money/credit.
A free market oriented persion would follow Bastiat's advice and examine not only what is seen: Increase activity in ETFs, but also attempt to examine what is unseen:Where central bank money seems to be going after it is created and given to large banking institutions.
Yes there is something left out. That is the old issue of Keynesian Economics associating symptoms and causes. As usual the author/expert makes this exact error. Speculators do not increase the price of a commodity as speculation is a zero sum game where one of the parties is better off and the other is necessarily worse off. In fact because speculators are willing to participate in these zero sum games, suppliers are able to reduce the risk and cost of commodity storage. So speculators have the opposite effect of causing large swings in prices and tend to moderate them.
The central banks in general and the Fed in particular on the other hand drive down the value of money by handing it out to a small group of individuals. These individuals then jump into the speculation game with this newly created money. So these folks can now bid up asset prices and futures contract prices over those who actually earned their money.
Here is a thought experiment: Say you are a small drilling company that needs to purchase $1 million for equipment to extract and transport 100,000 barrels of oil in 6 months. You think the price of oil currently at 100 will be 110 at that time. So you wish to write a contract to provide 10,000 barrels of oil in 6 months. Which would you prefer when you attempt to sell you contract:
1. In addition to the normal speculators you would add in 200 ETFs and all their resources.
2. In addition to the normal speculators you have Goldman Sachs or JP Morgan show up with all of this newly created money.
For your individual contract you may be say that both 1 and 2 could raise the price. But after the 6 months which can deliver a higher price of oil? My logic says that would be process 2. The first can not guarantee a higher price of anything in the future as consumers and sellers determine prices. All the speculators and their new ETFs do is attempt to guess it and then take the penalty or gain of an incorrect guess.
Well, since we're continuing the discussion here...
Speculation
The Social Function of Stock Speculators
The Social Function of Futures Markets
The Role Of Speculation & Governments In High Oil Price
The Market Works Just in Time
Speculators are Part of the Market
Correcting someone who says oil speculation and rising oil costs are causing inflation
Alex K,
What do speculators try to do? They try to buy when prices are low and sell when prices are high. In other words, they buy when supply is high and/or demand is low, and sell when supply is low and/or demand is high. So if prices are rising because of speculators, then that's because people believe that either supply will be too low or demand will be too high in the future. In other words, if prices are rising because of speculators, then that's because people believe that the price of the good will be higher in the future.
Speculators, by doing what they do, only act to "smooth" out the price changes. You see, if prices were set solely on the basis of supply and demand, then prices would be all over the place: prices would jump up and down at the slightest changes in supply and/or demand, in other words, the price would be really volatile. Speculators, by buying low and selling high, reduce price volatility and make life easier for the rest of us.
Furthermore, speculators send important signals to the market. If prices of a good increase because of speculation, then that is a good signal to producers of that good to produce more because prices are rising. Thus, speculators also help to regulate the market by calling forth greater supply.
Political Atheists Blog
Chapter 22 of Defending the Undefendible, by Walter Block, is about that great savior of society, the speculator.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
I've got a question about futures contracts and hope someone here has direct knowledge. If I buy a futures contract for delivery in, say, Jul 2014, does the underliying commodity actually get produced now and stored for 3 years? For example, does corn really sit in a silo somewhere and rot for that time period?
If not, if it doesn't get produced now, if it is just a promise to produce and deliver corn 3 years from now, how do we explain contango? It's my understanding that contango is nothing more than storage costs figured into the spot price.