One of the hidden factors behind this speculative bubble is the is in futures contracts.
The easiest example is something like oil.
So lets say that I'm a big shot trader.
1) I buy a 6 month contract on 10,000 barrels of oil at $120 a barrel. So my purchase price is $1.2 million.
2) Thousands of other speculators pour their money into oil, and since there's a limited amount of it the price rises. (The supply of oil is largely geologically determined rather than being a function of the market, and it is largely fixed such that production expansions consume both large qualities of time and capital)
So lets say that in stage 1 there is 100 million barrels of oil produced in a day. At $120 a barrel that's $12 billion of total value. But the rush of money into these speculative contracts leads to a situation in which there is $15 billion put into this particular investment. Supply is fixed in the short term, so that means that if demand is constant (oil demand is largely inelastic, people will pay whatever the cost, because they have little other choice) the price must rise. These speculators demand a profit, and so long as speculators believe that prices will rise, they will rise. Economics is more about impressions than realities. What people believe matters more than what the truth of the matter is. So with $15 billion sunk into the same pool of oil, that means that a barrel is now worth $150.
So 6 months ago I bought 10,000 barrels of oil to be delivered today for $1.2 million dollars, now that oil I bought is worth $1.5 million dollars. I walk away with $300,000 having done nothing but exchanged a few pieces of paper (or more likely a few electrons). And the price of crude jumps by 25% because of the collective impact of this type of movement.
Look at the evolution of volume in commodities markets. What's happening here is that speculators are looking for someplace to make a quick buck now that returns from real estate have dried up.
And the American consumer pays the bill.
Commodities markets need to be regulated, and the use of futures contracts needs to be limited to entities that are directly involved in the process of producing or consuming a commodity. For something like wheat than means that grain silo firms should be allowed to sell futures, and bakeries and the like to purchase them. Individuals who have are using the commodity as a vehicle for investment need to be prohibited from entering the market.
If they aren't they threaten to raise the price of products so high that it isn't economical to make bread with wheat, resulting in plummeting demand, which punishes producers who have responded to increasing prices with the expectation that they won't collapse. Collapses create large scale economic losses, because they destroy the difference in value between the price of commodity as a vehicle for speculation, and its value as an input into other economic activities.
So if wheat sells on the exchange for $16 a bushel, and it's uneconomic to produce bread if wheat is more than $8 a bushel, then eventually the difference between the two is going to collapse. And the speculators who catch the train too late are left selling wheat they bought at $16 a bushel for half the price they paid. So if I bought a million bushels of wheat for $16 million, I have to sell at $8 million. $8 million of value goes poof, or more accurately is sucked out of the part of the economy that actually produces items that society needs, into the part that creates nothing of social value.
Replayed at a national scale the economic impact is tremendous, and forces us to reevaluate what it means if we live in a $15 trillion economy, where half of it is smoke and mirrors. We suddenly become substantially less wealthy than we believed ourselves to be.
Hey, nice to see you here Middle! This is an excellent post and while I'll say we're on here debating which is the primary cause of this latest bubble (oil and I agree with you on speculative bubbles), the reality that people are being treated like objects, including our so called government representatives is a truth becoming most obvious. One can talk until they are blue in the face to their representatives and only get some corporate talking point blow off response, whereas if some lobbyist or super rich person speaks, they take what they say as pure gold.
I've looked at the history of unfettered capitalism and to me is sure seems like a constant state of hard bust and boom. To me our government has a responsibility to funnel those funds into investments that make sense for America instead of this glorified sociopathic gambling we have right now.
and I'll go further. I have seen more people argue for candidate x versus candidate y and ignore, I mean completely ignore what the specific policy positions are, the people behind candidate x are and what that means to the middle class. Now this is driving me nuts because trying to label something Progressive simply because people want it to be sure isn't going to get the policy changes needed either. I want to be free to stick to actual policy, facts, statistics versus be condemned because I don't subscribe to a particular person or in some cases wrong presented policy that actually will make the US middle class, working America's plight worse.
I mean what is the point of all of this if we, as not super rich lobbyists and other DC insiders, if we cannot get the public and our representatives actually representing us with policy that is reality based, statistically based and good for the nation as a whole.
Your chicken little comments where once again, we do not have people looking at the statistics. Although I must say timing or slope judgment (i.e. a dribble to despair over 30 years or the 4 Horsemen are galloping towards us and right over the hill), is quite tough to estimate.
Certainly Chicken Little doesn't help build up any credibility and assuredly creates yet another cult type movement or a me too movement instead of in this day and age of blogs, trillions of bits to analyze everything and information at the click of a mouse, getting people to think for themselves and look at the details.
The Devil resides in those details, luring, waiting to stick us with his pitchfork and there is no sudden Armageddon, this is a slow torturous death of the US middle class.
and thanks for the Der Spiegel link. I read the entire article, which was excellent.
When oil moves 15% higher in two days, that is not trading on the fundamentals of supply and demand: that is emotional, that is a buying panic, and that is speculation. The one part I don't understand is how trading in "paper" commodities can drive the "real" price. Unless somebody is hoarding, at the end of the day, the actual supply of and demand for a commodity should still be determining its price.
We certainly see this with the rush to offshore outsource every job. They didn't think about the results, they just bought in and something like 60% of those projects failed.
The CEOS, executives out of any class to me act like a herd of cattle and all it takes is one to drive them to stampede. They also do not seem to be able to add.
For example, now that energy costs are going up, I guess none of them bothered to analyze their global supply chain in terms of that. All they looked at was cheap labor labor, never the stupidity of making some rinky dink part that weighs a ton in China and shipping it back, where the costs of shipping exceed US manufacture.
Frankly, I have no problem with the gummint stepping in to stabilize things...
As long as the policy makers don't make the mistake of thinking this intervention can be a permanent thing. That it is a 'solution' when in reality it's only a stopgap.
The real solution is changing the economy to that real incomes for the consumer stop falling.
That is, reward word and entrepreneurship not financialization and outsourcing.
FDR understood this. I say whack the top income earners at +5 million with a 90% tax rate, clean up the bs going on with corporate taxes and, taking the trillions so generated, start a massive infrastructure rebuild. Include the Solar Grand Plan and any other scheme that looks promising. Start a new WPA for the homeless and unemployed and build an energy sustainable economy before we hit the Olduvai Gorge and that becomes impossible.
I really suggest we get started before they have to shut the banks like they did in '32.
and the reason is because of the Senate hearing that I watched and also wrote up. It was fairly clear for example that they controlled the home heating oil market in the NE and thus could set prices.
There should be a webcast of the entire thing and some facts came out in it which made me think otherwise. I'm with Greenburg that closing the Enron loophole will help enormously.
Soros also testifies on precisely what you're talking about, so it's not an either/or choice on causes/effects, but the two of them basically reaffirms each others viewpoints (Soros - dollar, Greenburg - commodities futures speculation).
I think it's worth it to watch the entire testimony and Q&A on this one.
I use the term "hedgers" because that is what most people are doing in commodities - hedging against a falling dollar. Fixing the falling dollar would automatically get people out of commodities, as well as solving all sorts of other issues.
Going after these people for hedging is like combating global warming by banning thermometers (to borrow someone else's expression).
Ultimately this tactic will fail, and the rich will figure a way around it first.
Very good analysis! I like to chat locally to people and that's generally what I hear. People are scrimping on things like meat, frozen foods, soda, pretty much anything they can find and they are running out of places to find at this point, in order to get the extra money to fill up their gas tanks.
With globalization forcing global labor arbitrage, downward pressure on wages and longer periods without any wages plus forced early retirement, I believe the US middle class is on the cliff as a whole.
I think we need to look at just how many have been pushed off the middle class cliff recently.
reads like a title for a major writing series. FYI. Offtopic but is anyone noticing even economists are coming up with some increasingly catchy blog titles as of late? Making Economics fun, while the topics sure as hell aren't fun or funny.
wrote in his piece (in the studies) they will blow past the US in 5 years, 10 years total from the start of the China PNTR. What's wrong with this picture.
Although your catch (and it seems you're not speaking orthodoxy, way to go!) on the inflationary, credit crunch issue I think will cause a dip, or maybe a trough. Would the US jump on that to get some manufacturing back? ha ha.
I think we should make this a buzz phrase, for ain't it the truth on multiple issues?
socialism for the rich, capitalism for the poor
I'd be fine with helping those with predatory loans as well as some sort of ease down if people plain bought houses outside of their ability to afford them, although some consequence should happen with that, for I certainly didn't go out and get a house I knew I couldn't afford because some enthusiastic real estate agent describes new "mortgage vehicles".
This is a great post midtowng, is there anyplace the US middle class and poor are not getting soaked?
I suspect the damage because of the massive debt held by foreigners in this country would outweigh any advantages in terms of the trade deficit.
Even worse are other countries, like China, their companies will not import us as foreign labor or offshore outsource their core manufacturing. They were never that dumb.
Loss of AAA credit rating and the fall of the dollar from reserves will hurt our horribly imbalanced import/export market- possibly to the point that manufacturing will return to the United States as the price of cheap Chinese engineering goes through the roof.
Short term, they are caught in an inflationary boom. Long term (and maybe not that far away either) they are going to blow past the US as an economic (and then military) superpower.
The other news is that their stock market continues to implode, now down ~53% from last autumn. Their retail sales are a coincident indicator, but the stock market crash as a leading indicator gives me pause.
This is exactly what Tim Duy predicted would have to be considered by countries like China, in the article I linked to in the "Result of the Fed's Rate Cuts" diary.
China will have to consider whether the benefits of cheaper imports will outweigh the cost of more expensive exports to the US.
Being the world's biggest debtor nation means we get to watch, and deal with the consequences.
Bloomberg and they are saying this shows the strength of the China economy in the midst of weakening global support (i.e. they are kicking our ass, which I know you think subsidies are going to have a strong effect, but with the other facts, I see it as more of a dip in their road to economic domination).
One of the hidden factors behind this speculative bubble is the is in futures contracts.
The easiest example is something like oil.
So lets say that I'm a big shot trader.
1) I buy a 6 month contract on 10,000 barrels of oil at $120 a barrel. So my purchase price is $1.2 million.
2) Thousands of other speculators pour their money into oil, and since there's a limited amount of it the price rises. (The supply of oil is largely geologically determined rather than being a function of the market, and it is largely fixed such that production expansions consume both large qualities of time and capital)
So lets say that in stage 1 there is 100 million barrels of oil produced in a day. At $120 a barrel that's $12 billion of total value. But the rush of money into these speculative contracts leads to a situation in which there is $15 billion put into this particular investment. Supply is fixed in the short term, so that means that if demand is constant (oil demand is largely inelastic, people will pay whatever the cost, because they have little other choice) the price must rise. These speculators demand a profit, and so long as speculators believe that prices will rise, they will rise. Economics is more about impressions than realities. What people believe matters more than what the truth of the matter is. So with $15 billion sunk into the same pool of oil, that means that a barrel is now worth $150.
So 6 months ago I bought 10,000 barrels of oil to be delivered today for $1.2 million dollars, now that oil I bought is worth $1.5 million dollars. I walk away with $300,000 having done nothing but exchanged a few pieces of paper (or more likely a few electrons). And the price of crude jumps by 25% because of the collective impact of this type of movement.
Look at the evolution of volume in commodities markets. What's happening here is that speculators are looking for someplace to make a quick buck now that returns from real estate have dried up.
And the American consumer pays the bill.
Commodities markets need to be regulated, and the use of futures contracts needs to be limited to entities that are directly involved in the process of producing or consuming a commodity. For something like wheat than means that grain silo firms should be allowed to sell futures, and bakeries and the like to purchase them. Individuals who have are using the commodity as a vehicle for investment need to be prohibited from entering the market.
If they aren't they threaten to raise the price of products so high that it isn't economical to make bread with wheat, resulting in plummeting demand, which punishes producers who have responded to increasing prices with the expectation that they won't collapse. Collapses create large scale economic losses, because they destroy the difference in value between the price of commodity as a vehicle for speculation, and its value as an input into other economic activities.
So if wheat sells on the exchange for $16 a bushel, and it's uneconomic to produce bread if wheat is more than $8 a bushel, then eventually the difference between the two is going to collapse. And the speculators who catch the train too late are left selling wheat they bought at $16 a bushel for half the price they paid. So if I bought a million bushels of wheat for $16 million, I have to sell at $8 million. $8 million of value goes poof, or more accurately is sucked out of the part of the economy that actually produces items that society needs, into the part that creates nothing of social value.
Replayed at a national scale the economic impact is tremendous, and forces us to reevaluate what it means if we live in a $15 trillion economy, where half of it is smoke and mirrors. We suddenly become substantially less wealthy than we believed ourselves to be.
Hey, nice to see you here Middle! This is an excellent post and while I'll say we're on here debating which is the primary cause of this latest bubble (oil and I agree with you on speculative bubbles), the reality that people are being treated like objects, including our so called government representatives is a truth becoming most obvious. One can talk until they are blue in the face to their representatives and only get some corporate talking point blow off response, whereas if some lobbyist or super rich person speaks, they take what they say as pure gold.
I've looked at the history of unfettered capitalism and to me is sure seems like a constant state of hard bust and boom. To me our government has a responsibility to funnel those funds into investments that make sense for America instead of this glorified sociopathic gambling we have right now.
and I'll go further. I have seen more people argue for candidate x versus candidate y and ignore, I mean completely ignore what the specific policy positions are, the people behind candidate x are and what that means to the middle class. Now this is driving me nuts because trying to label something Progressive simply because people want it to be sure isn't going to get the policy changes needed either. I want to be free to stick to actual policy, facts, statistics versus be condemned because I don't subscribe to a particular person or in some cases wrong presented policy that actually will make the US middle class, working America's plight worse.
I mean what is the point of all of this if we, as not super rich lobbyists and other DC insiders, if we cannot get the public and our representatives actually representing us with policy that is reality based, statistically based and good for the nation as a whole.
Your chicken little comments where once again, we do not have people looking at the statistics. Although I must say timing or slope judgment (i.e. a dribble to despair over 30 years or the 4 Horsemen are galloping towards us and right over the hill), is quite tough to estimate.
Certainly Chicken Little doesn't help build up any credibility and assuredly creates yet another cult type movement or a me too movement instead of in this day and age of blogs, trillions of bits to analyze everything and information at the click of a mouse, getting people to think for themselves and look at the details.
The Devil resides in those details, luring, waiting to stick us with his pitchfork and there is no sudden Armageddon, this is a slow torturous death of the US middle class.
and thanks for the Der Spiegel link. I read the entire article, which was excellent.
When oil moves 15% higher in two days, that is not trading on the fundamentals of supply and demand: that is emotional, that is a buying panic, and that is speculation. The one part I don't understand is how trading in "paper" commodities can drive the "real" price. Unless somebody is hoarding, at the end of the day, the actual supply of and demand for a commodity should still be determining its price.
of Economist's View, offers a rebuttal, here.
We certainly see this with the rush to offshore outsource every job. They didn't think about the results, they just bought in and something like 60% of those projects failed.
The CEOS, executives out of any class to me act like a herd of cattle and all it takes is one to drive them to stampede. They also do not seem to be able to add.
For example, now that energy costs are going up, I guess none of them bothered to analyze their global supply chain in terms of that. All they looked at was cheap labor labor, never the stupidity of making some rinky dink part that weighs a ton in China and shipping it back, where the costs of shipping exceed US manufacture.
Lots of examples like this.
Frankly, I have no problem with the gummint stepping in to stabilize things...
As long as the policy makers don't make the mistake of thinking this intervention can be a permanent thing. That it is a 'solution' when in reality it's only a stopgap.
The real solution is changing the economy to that real incomes for the consumer stop falling.
That is, reward word and entrepreneurship not financialization and outsourcing.
FDR understood this. I say whack the top income earners at +5 million with a 90% tax rate, clean up the bs going on with corporate taxes and, taking the trillions so generated, start a massive infrastructure rebuild. Include the Solar Grand Plan and any other scheme that looks promising. Start a new WPA for the homeless and unemployed and build an energy sustainable economy before we hit the Olduvai Gorge and that becomes impossible.
I really suggest we get started before they have to shut the banks like they did in '32.
and the reason is because of the Senate hearing that I watched and also wrote up. It was fairly clear for example that they controlled the home heating oil market in the NE and thus could set prices.
There should be a webcast of the entire thing and some facts came out in it which made me think otherwise. I'm with Greenburg that closing the Enron loophole will help enormously.
Soros also testifies on precisely what you're talking about, so it's not an either/or choice on causes/effects, but the two of them basically reaffirms each others viewpoints (Soros - dollar, Greenburg - commodities futures speculation).
I think it's worth it to watch the entire testimony and Q&A on this one.
I use the term "hedgers" because that is what most people are doing in commodities - hedging against a falling dollar. Fixing the falling dollar would automatically get people out of commodities, as well as solving all sorts of other issues.
Going after these people for hedging is like combating global warming by banning thermometers (to borrow someone else's expression).
Ultimately this tactic will fail, and the rich will figure a way around it first.
Very good analysis! I like to chat locally to people and that's generally what I hear. People are scrimping on things like meat, frozen foods, soda, pretty much anything they can find and they are running out of places to find at this point, in order to get the extra money to fill up their gas tanks.
With globalization forcing global labor arbitrage, downward pressure on wages and longer periods without any wages plus forced early retirement, I believe the US middle class is on the cliff as a whole.
I think we need to look at just how many have been pushed off the middle class cliff recently.
reads like a title for a major writing series. FYI. Offtopic but is anyone noticing even economists are coming up with some increasingly catchy blog titles as of late? Making Economics fun, while the topics sure as hell aren't fun or funny.
wrote in his piece (in the studies) they will blow past the US in 5 years, 10 years total from the start of the China PNTR. What's wrong with this picture.
Although your catch (and it seems you're not speaking orthodoxy, way to go!) on the inflationary, credit crunch issue I think will cause a dip, or maybe a trough. Would the US jump on that to get some manufacturing back? ha ha.
I think we should make this a buzz phrase, for ain't it the truth on multiple issues?
socialism for the rich, capitalism for the poor
I'd be fine with helping those with predatory loans as well as some sort of ease down if people plain bought houses outside of their ability to afford them, although some consequence should happen with that, for I certainly didn't go out and get a house I knew I couldn't afford because some enthusiastic real estate agent describes new "mortgage vehicles".
This is a great post midtowng, is there anyplace the US middle class and poor are not getting soaked?
I suspect the damage because of the massive debt held by foreigners in this country would outweigh any advantages in terms of the trade deficit.
Even worse are other countries, like China, their companies will not import us as foreign labor or offshore outsource their core manufacturing. They were never that dumb.
"Sorry that you lost your legs, but on the good side you lost a whole bunch of weight too so you don't have to diet anymore."
Loss of AAA credit rating and the fall of the dollar from reserves will hurt our horribly imbalanced import/export market- possibly to the point that manufacturing will return to the United States as the price of cheap Chinese engineering goes through the roof.
Short term, they are caught in an inflationary boom. Long term (and maybe not that far away either) they are going to blow past the US as an economic (and then military) superpower.
The other news is that their stock market continues to implode, now down ~53% from last autumn. Their retail sales are a coincident indicator, but the stock market crash as a leading indicator gives me pause.
This is exactly what Tim Duy predicted would have to be considered by countries like China, in the article I linked to in the "Result of the Fed's Rate Cuts" diary.
China will have to consider whether the benefits of cheaper imports will outweigh the cost of more expensive exports to the US.
Being the world's biggest debtor nation means we get to watch, and deal with the consequences.
I love our middle column. Just saw this about China meeting to unpeg the Yuan in order to stop soaring commodities as well as afford oil.
Bloomberg and they are saying this shows the strength of the China economy in the midst of weakening global support (i.e. they are kicking our ass, which I know you think subsidies are going to have a strong effect, but with the other facts, I see it as more of a dip in their road to economic domination).
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