JUDGMENT CALLS
Robert J. Samuelson
Let’s Shoot the Speculators!
The candidates say financial slimeballs are piling into commodities markets and pushing prices to artificial and unconscionable levels. If only it were that simple.
Tired of high gasoline prices and rising food costs? Well, here's a solution. Let's shoot the "speculators." A chorus of politicians, including John McCain, Barack Obama and Sen. Joe Lieberman, blames these financial slimeballs for piling into commodities markets and pushing prices to artificial and unconscionable levels. Gosh, if only it were that simple. Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don't understand what's happening or don't want to acknowledge their complicity.
Granted, raw-material prices have exploded across the board. Look at the table below. It shows price increases for eight major commodities from 2002 to 2007. Oil rose 177 percent, corn 70 percent and copper 360 percent. But that's just the point. Did "speculators" really cause all these increases? If so, why did some prices go up more than others? And what about steel? It rose 117 percent—and continued increasing in 2008—even though it's not traded on commodities futures markets.
A better explanation is basic supply and demand. Despite the U.S. slowdown, the world economy has boomed. Since 2002, annual growth has averaged 4.6 percent, the highest sustained rate since the 1960s, says economist Michael Mussa of the Peterson Institute. By their nature, raw materials (food, energy, minerals) sustain the broader economy. They're not just frills. When unexpectedly high demand strains existing production capacity, prices rise sharply as buyers scramble for scarce supplies. That's what happened.
"We've had a demand shock," says analyst Joel Crane of Deutsche Bank. "No one foresaw that China would grow at a 10 percent annual rate for over a decade. Commodity producers just didn't invest enough." In industry after industry, global buying has bumped up against production limits. In 1999, surplus world oil capacity totaled 5 million barrels a day (mbd) on global consumption of 76mbd, reckons the U.S. Energy Information Administration. Now the surplus is about 2mbd—and much of that in high-sulfur oil not wanted by refiners—on consumption of 86mbd.
Or take nonferrous metals, such as copper and aluminum. "You had a long period of underinvestment in these industries," says economist John Mothersole of Global Insight. For some metals, the collapse of the Soviet Union threw added production—previously destined for tanks, planes and ships—onto world markets. Prices plunged as surpluses grew. But "the accelerating growth in India and China eliminated the overhang," Mothersole says. By some estimates, China now accounts for 60 percent to 80 percent of the annual increases in world demand for many metals.
Commodity-price increases vary, because markets vary. Rice isn't zinc. No surprise. But "speculators" played little role in the price run-ups. Who are these offensive souls? Well, they often don't fit the stereotype of sleazy high rollers: many manage pension funds or university and foundation endowments. Their modest investments in commodities aim to improve returns.
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Member Comments
Posted By: Nins @ 07/13/2008 1:51:57 AM
Comment: Mark, with all due respect, if you are a futures trader you can't possibly believe that unregulated massive futures trading does not effect the price of commodities. I think that you are trying to cover you a$$ (dollar signs included) by posting this condescending "Oh, don't worry, little people" kind of tripe.
Posted By: Nins @ 07/13/2008 1:48:03 AM
Comment: Dear Guy, my thoughts are the same as before. Part of what I was saying is that people are mis-informed when they think this is a demand phenomenon. Demand has added to it, but considering that the increased demand form China is equal to the stockpiling done by the futures market, I would say that demand can't account for more than half of the price inflation.
John Hofmesiter, President of Shell Oil Company, says that the proper, uninflated production price of a barrel of crude oil is no more than $65. (http://www.financialpost.com/reports/oil-watch/story.html?id=532747)
Clarence Cazalot, CEO of Marathon Oil, stated in November of 2007 that "$100 oil just isn't justified by the physical demand on the market - it is speculation on the futures market that is driving this." (http://money.cnn.com/2007/11/12/markets/oil_hundred/index.htm?postversion=2007111216)
Do you REALLY think that these men at the top of the oil industry don't know what they are talking about?
Posted By: Nins @ 07/13/2008 1:41:24 AM
Comment: Know why McCain wants to distance himself from former Senator Phil Gramm? It's not because of Gramm's obnoxious remarks calling Americans "a nation of whiners" who are in "a mental recession." Those remarks were so ascerbic that they may've been made just to give McCain an excuse to distance himself from Gramm. This issue is a lot deeper than it looks on the surface.
When Gramm was a Senator he was Chairman of the Banking Committee. He pushed through the legislation known as the "Enron Loophole." This loophole allowed US investment banks to bypass Federal regulations governing futures trading, and is the reason why investment banks were able to falsely inflate the prices of oil, wheat, corn and other commodities through massive futures trading, causing your costs of gas, heating oil and food to go through the roof.
Gramm also created the Gramm-Leach-Biley Act, which got rid of the laws that seperate banking, insurance and brokerage activities in America. The Gramm Act was touted as a new way to protect consumer privacy, but the real meat on the Act's bones was banking deregulation. Essentially, this Act did away with laws written after the Great Depression to protect us from another Wall Street/Banking Industry collapse. That's right, Gramm stripped the system of it's safe guards nine years ago, and guess what? The value of the dollar has nose-dived, four major economic institutions have failed, Wall Street is unstable, and we are in a worsening recession.
Notably, the US investment banks that gained the most from the Enron Loophole and from the Gramm Act contributed more than a million dollars to Gramm's campaign.
Currently Gramm is Vice Chairman of UBS, the Swiss Bank that came up with the idea of "death bonds." Worse, though, UBS is involved in a scam where they sold auction rate securities to American customers. Auction rate securities are supposed to be as safe as cash, but the way UBS did it, the fees garnished by their in-house investment bankers were intentionally higher than the return on the securities, ripping off their American customers. The Massachusetts Attorney General has already filed charges against UBS, and private brokers world-wide have dropped UBS stock. UBS is forecasted to lose 82.91% of it's value in 2008. We are talking about the corporate bank where Gramm is Vice Chairman. Looking at his track record there and at the havoc he has wrought on the US economy through the Senate Banking Committee, it's clear that Gramm is a either criminal or grossly incompetent.
Now McCain wants nothing to do with Gramm, wants us to forget Gramm has been a key player on McCain's team. Gramm was McCain's campaign CO-CHAIR and LEADING ECONOMIC ADVISOR. Previously, McCain had said that he planned to appoint Gramm as SECRETARY OF THE TREASURY.
With Gramm as McCain's leading economic advisor, now you know why economists and analysts say that McCain's economic policy plans are untenable.