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The Global Oil Scam: 50 Times Bigger than Madoff

Mark Anthony:

It is true, as you say, that speculation in commodities futures is a zero sum game. When speculators buy commodities they increase demand and thereby increase the price of the commodity. But when it comes time for those same speculators to sell their commodities they increase supply which puts downward pressure on the price of the commodity. The excess demand of speculation on the upside is exactly equal to the excess supply of speculation on the downside so there should be no net effect on the price of the commodity. Some speculators 'win' by selling to other speculators who lose. It is precisely a poker game where speculators' money is the pot and some win and some lose.

But this is not what is happening anymore. Now we have very deep pocketed speculators who keep their money in the futures market. They are no longer buying and selling deliveries of oil. They have 'securitized' the futures market. Now they buy and sell "contracts", not oil deliveries. So they push up the price of real future delivery contracts by raising demand, but they never push the price back down by unwinding those positions and increasing supply. They just roll over their contracts again and again, with GS and friends collecting fees on each transaction. So the fee collectors like GS reap gains while investors in the GS index fund lose their money to pay Goldman's gains. Speculators who buy commodities futures as a hedge against currency devaluation may actually come out ahead, if the US$ loses 5% and their loss on the futures market is only 2%, for e.g.

Meanwhile the speculative money that is holding demand price at artificially high levels means real oil suppliers sell to real oil buyers at the inflated price. Oil suppliers get the gain. And that inflation is 100% passed on to us, the ultimate consumers of gas and diesel and jet fuel. Actually a bit less than 100% is paid by end consumers, as refiners have been suffering lower profit margins so they eat a share of the cost too.

Oil was pushed down to $30 when GS and the other big speculators faced the cash crunch of 2008-09 and had to liquidate their commodities positions to cash up and cover losses (i.e. "add capital") in their other activities. That is what happens when speculators actually sell, the price collapses to (or below) its natural supply-demand level. But TARP, etc "recapitalized" the newly converted "bank holding company" GS and friends so they're back in business inflating the futures markets and sucking money out of the pockets of consumers and the smaller scale suckers who try to profit from commodities speculation in a field that is owned and operated by GS & Co.

Breaking Up the Big Banks: Ackermann vs. Hoenig

Many commenters have been pointing out that we're barely into the first stages of this financial crisis. First came the desperate bailing out of the sinking ship of finance. Now that the threat of imminent catastrophe is past we are starting to take a cooler look at what caused the crisis and how to ensure the ship is made more seaworthy.

During the early panic phase the money center banks were indeed too big to fail, we had to keep the ship afloat. But now that the ship is floating the consensus is emerging that a main contributor to the severity of the crisis was that the financial system was way too top heavy. The listing of just a couple of the too bigs threatened to capsize the whole boat. The solution is to reduce their height and spread their mass around more evenly. These behemoths are not seaworthy. They need to be broken up and their business spread around more horizontally.

We tried big and in the past 10 years, after Glass-Steagall and other limiting regulations were repealed, we tried too big. We were told that economies of scale enjoyed by too big banks would make our financial ship more seaworthy, not less. They were wrong. They nearly sunk us all. I think we can now safely agree with Mr. Johnson and Mr. Hoenig. "Too Big Has Failed".

The Commodities ETF Crackdown Continues

I agree with Alan Young. If you're not a commodity producer or consumer then buying and selling futures is 'speculating', which is a zero sum game for speculators as a whole.

Let's assume that producers and consumers will sell and buy at market clearing prices. If speculators add buy money into this equation they can raise prices. But when they try to sell to realize gains the additional selling they add to the market drops the price at least as far as their buying raised it. Some speculators can make gains, but ALL of these gains are simply the losses of the other speculators in this market. John Stuart Mill pointed this out in his "Principles of Political Economy" published over 160 years ago, and the arithmetic hasn't changed.

One thing that has changed, though, is that there is now a huge volume of US dollars in the US and floating around the world, and the dollar is devaluing. So to hedge against currency devaluation people buy commodities and keep their money in this market. So the price is kept elevated for an extended period and will only drop to its true market level when all the speculators sell and take their money out. Speculators may suffer some losses at rollover time but if those losses are less than the amount the dollar is declining their hedge strategy is still working for them.

Meanwhile the price of the commodities is held higher than the 'pure' market price, with suppliers enjoying all the gains.