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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.

Is Excessive Speculation in Oil and Commodities Markets Actually Occurring?

I also agree with Steve K. If speculation does not affect commodity prices how is it possible for speculators to make any money?

Mr. Pirrong is talking about a zero sum equation where the price does not change with or without speculators. If both producer and user agree to $60/barrel then the 'zero sum' is $60. For a speculator to make money on the trade either the producer sells to the speculator for less than $60 or the user pays the speculator more than $60.

The only way a speculator can make money is by buying from the producer at a price cheaper than the end buyer (who takes delivery) pays. If the buyer pays a higher price then speculation raises prices, which Mr. Pirrong claims is not happening.

So either speculation raises prices or it 'taxes' producers by inducing them to sell below market price--the price the end user is willing to pay. And if producers sell below market then speculation affects prices on the supply side.

So either Mr. Pirrong's argument is arithmetically impossible, or speculators make no money and are "providing liquidity" to the futures markets as a free service. Gee, I never realized Goldman Sachs and investors in commodities ETFs are such altruists.

Food: Against Self-Sufficiency

Kunst,
Good points. Just as the US is now intensely aware of energy insecurity due to import dependance, every country should do what it can to maintain some level of food security. Markets can and do fail so insurance is worth paying a price for.

It's not just Western agricultural subsidies that hurt local farmers in developing countries. How are these farmers supposed to compete with the free food we send by the shipload as "food aid"? We fell virtuous about our charity while destroying the profitability and development hopes of local farmers.

It is because of price spikes during shortages that suppliers can earn windfall profits to invest and increase their productivity. Food aid and Western ag subsidies subvert these economics and keep these farmers permanently poor and low-productive. Consumers suffer short term during price spikes but producers benefit and in the longer term consumers enjoy enhanced food security as well as lower prices from more abundant crops. Unfortunately I think the 24 hour news cycle coupled with our soft hearts and softer heads prevents us from letting markets do their work in developing economies.

Impending Inflation? The Global 'New Deal' All but Guarantees It

L-Bow:
There are only 3 ways money can be created in the first place.
1. A bank makes a new loan which creates a new deposit in the borrower's account, which the borrower spends into the economy.
2. A bank sells a security to the Fed in exchange for Federal Reserve notes ("cash") or a credit in the bank's Fed account. Banks hold the cash to satisfy their depositors' cash withdrawal demands.
3. The federal governments sells securities to the Fed and the Fed credits the government's account, and the government spends the money into the economy.

Each of these actions (except banks holding money in their Fed account) increases the M1 circulating money supply. The point is, this is all the "money" there is.

When a borrower repays a loan the deposit (which had circulated around the economy until the borrower collected it back to repay the loan) ceases to exist and the money supply is reduced by that amount. When the government redeems its security from the Fed with money it collected by taxing the money it spent into the economy back out of the economy, that money ceases to exist.

L-Bow asks, "Who will borrow all the money that is printed to reinflate the economy?" If the government borrows money from the Fed to pay for infrastructure projects or more rounds of "stimulus" checks, that's one way to do it. Then don't tax it out of the economy until after a general recovery has occurred. This will not be inflationary because a lot of people will use the new income to pay down their personal debts and that debt-money will cease to exist.

If the government borrows money to buy up mortgages and other distressed assets, the banks who made the mortgages will reabsorb the loan money and it will cease to exist, so this is not inflationary. Actually this is deflationary, because the money supply decreases by the amount of the repaid mortgages.

Banks are at or near technical insolvency not necessarily because their cash reserves are too low, but because their capital value has dropped so much when bank share prices fell along with the rest of the stock market. Banks have a legislated upper limit of assets (loans) to capital (common and preferred shares and long term debentures they hold). I think the ratio is 20 to 1 but that might be outdated. By selling assets like mortgages to gov't they can get their ratio back in line with their reduced capital value. The government owes money to the Fed, but this debt can be treated as an accounting nicety and ignored as long as it is expedient to do so.

Banks don't "have to" fail, even if they are in technical default. The decision is up to the Comptroller of the Currency. It is in nobody's interest to destroy the US banking system so banks are being helped out of this hole.

I think the private sector will be pretty shy of new borrowing for awhile so I don't think there will be any inflation happening unless the federal government decides to inflate away US foreign debt. Paulson's $700 billion will just restore bank's balance sheets by reducing their assets to a level in line with their reduced capital. That money will never circulate.

But the original borrowers of that $700 billion spent it into the economy. The people who sold things to the borrowers still have that money (if they lost it, someone else has it). So there's a lot of "owned" money in the economy: the people who now own the money are not the people who owe that money to the banks. That money is sitting it out waiting to see what happens. Eventually it will get invested and spent, and the gov't can start taxing to collect the money to repay the Fed. It would take some working out, but the thing could be fixed in this way.