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Austinhousingbubble says

Never mind the article — I was pointing to the chart which illustrated my point rather well.

Correlation is not imply cause. Many people looked at the fundamentals of commodities, and decided it was a good speculative bet.

BTW, most of the growth in the futures market was in "side bets" that were tied to the price of the underlying commodity, e.g. the ICE futures market in London. Side bets on the price of oil can no more influence the price of oil than side bets on the throw of a pair of dice can affect the throw.

BTW, most of the growth in the futures market was in “side bets” that were tied to the price of the underlying commodity,

Actually, in 2008 when oil was at about $130-45 a barrel, an estimated 99% of the oil market was controlled by speculators - namely JP Morgan and GS. Again, we have the lack or reform (abolishing the 'Enron loophole' for starters) to thank, and to also ensure that more excessive speculation in the oil market is just a matter of time.

The verdict is in on this. The position that supply/demand is what ultimately dictates the oil market is simply not the reality.

This is called a free market.

No -- a $13 billion to $317 billion increase in speculative money in less than five years is not free market phenomena. It's very much a gigged market.

Austinhousingbubble says

The verdict is in on this.

I agree, and it points to paper speculators having only a temporary effect. Usually they keep price volatility low, but sometimes they can amplify it, like in 2008. But even that isn't even clear, since commodities prices were very volatile long before futures markets, and in fact that was part of the point of creating them.

You quote Rolling Stone, and a politician. But almost every economist and expert on commodities trading says speculators have little long term effect, unless they are somehow manipulating the futures market or hoarding physical supplies, and there was little evidence of that.

You mention JP Morgan. Some traders, like JP Morgan played the contango trade by buying oil at spot, selling futures contacts for higher price, and keeping it in tankers for delivery at the higher price a few months later. They burned some very stupid dumb money speculators that paid too much for those contracts. The point is dumb speculators are often met by smart speculators who are happy to take their money, and that keeps the price in check in the long run. If only it were possible to speculate on the fall of real estate prices. RE bubbles would not get so out of control.

You quote Rolling Stone, and a politician.

It was a damn good article, but that particular snippet was merely highlighting established facts/figures spanning 2003 to 2008, which clearly illustrate the level of manipulation going on as opposed to natural peaks & troughs in the supply/demand curve.

But almost every economist and expert on commodities trading says speculators have little long term effect,

Certainly not economists like Mark Zandi, or Gerry Ramm of Petroleum Marketers Association of America, or former CFTC director Michael Greenberger -- all of whom have been very vocal about the major role that excessive speculation has played in juicing the cost of oil/oil futures.

unless they are somehow manipulating the futures market or hoarding physical supplies, and there was little evidence of that.

In fact, back in '08 Michael Greenberger came out against the Wall St investment banks for manipulating the oil futures markets and for hoarding heating, crude and gasoline. My worry going ahead is that since there's been no financial reform, and since bad policy like the Enron Loophole and the decidedly deregulatory CFMA is still in place, this problem is not going away and that oil prices are bound to go ape again. Sooner than later.

One of the most recent articles I read was from April 6th. You can check it out here:

http://www.cnbc.com/id/36194255/

"Al-Attiyah, whose country is one of 12 member states of the Organization of the Petroleum Exporting Countries, said that speculation remained a key force behind the price rally—an impetus that eclipsed supply and demand fundamentals .... The Qatari oil minister said global crude inventories remain very high."

Maybe a speculative casino-style economy is the only viable framework left in America. Long term investment in enterprise is dead, even on the individual consumer level, as evidenced by the resurgence in house flipping and HELOC abuse. I forget who said it, but without fraud and speculation, there would be nothing left of the American economy but porn and donuts.

Tatupu, why would you say that no one should want deflation?

Regular people, who are paid in fiat money, should want that fiat money to be further debased and to decrease in value?

Mild deflation is exactly want the average person wants. Not intense enough to slow the economy down, but enough so that daily necessities become mildly cheaper over time and the value of one's savings increases. The steady increase in human productivity -- producing more and better goods for less labor and energy input -- should provide people with this situation.

Michinaga says

Mild deflation is exactly want the average person wants. Not intense enough to slow the economy down, but enough so that daily necessities become mildly cheaper over time and the value of one’s savings increases. The steady increase in human productivity — producing more and better goods for less labor and energy input — should provide people with this situation

By definition, deflation means the economy is slowing down. It is shrinking--think recession. I agree that I like it when things that I buy go down in price, but the problem is that it eventually leads to job losses and high unemployment.

tatupu70 says

Michinaga says

Mild deflation is exactly want the average person wants. Not intense enough to slow the economy down, but enough so that daily necessities become mildly cheaper over time and the value of one’s savings increases. The steady increase in human productivity — producing more and better goods for less labor and energy input — should provide people with this situation

By definition, deflation means the economy is slowing down. It is shrinking–think recession. I agree that I like it when things that I buy go down in price, but the problem is that it eventually leads to job losses and high unemployment.

No it doesn't. Deflation has 2 definitions in economics. Keynesians and Monetarists refer to deflation as falling prices. Austrian economists refer to it as the contraction of money supply. Keynesians and Monetarists believe deflation (falling prices) leads to economic slowdown (Ben Bernanke's thesis). But it doesn't. In fact, at the end of the 19th century, we had nothing but a booming economy with falling prices throughout.

Deflation doesn't mean the economy is slowing down. Falling prices can be a product of increasing supply through productivity. People always like to point to LCD TVs as a "sign of deflation". Well, LCD & Plasma TVs used to cost 10 times more than they did at the beginning of this decade. Yet, as the price has come down, much more people have been employed selling and manufacturing LCD TVs than before. People buy more goods as prices come down. That increases employment.

Austinhousingbubble says

This is called a free market.

No — a $13 billion to $317 billion increase in speculative money in less than five years is not free market phenomena. It’s very much a gigged market.

Did you read my post past the first 6 words? I didn't comment on the manipulative bubble of 2008, I commented on the futures markets as they usually and are supposed to run. I was very clear that futures markets must be free of manipulation and open ie not being run by backroom deals from Goldman Sachs. You must have missed the paragraph in the article were Taibbi says that MANIPULATION turned a once solid market into a casino. The same article points out that the regulators collaborated in secret with Goldman.

You also fail to note that oil crashed back to $33 per barrel. That's what happens every time with bubbles. At that point the article tries to have it both ways. It rants about evil speculators for driving the price up then talks about ordinary people who lost out in the crash. Which is it? The same exact people who bought on the way up lost out on the way down.

didn’t comment on the manipulative bubble of 2008, I commented on the futures markets as they usually and are supposed to run

.
The qualifiers here are "usually" and "supposed to" -- on paper, perhaps these markets work this way, but certainly not in practice -- certainly not during the last few administrations. The last ten or so years of our economy have been fueled primarily by speculation; lacking any meaningful reform, the excessive speculation that peaked in 2008 will not be an isolated incident. Of course, the bunch who suddenly fancy themselves the Austrian school like to bandy around the rather oversimple notion of zero government regulation in any iteration, preferring the market regulate itself and the government just get out of the way -- but given the piss poor track record of the SEC, CFTC and the watered down attempts at reform, zero oversight was and remains the reality we presently enjoy. And it sucks.

By the way, oil crashed back to $33 a barrel because of the total financial meltdown, not because of a natural deflection in the supply/demand curve. Show me a market that didn't tank between 2008 and now (I know of only a few). The banks were broke and the consumers were in a panic. Cash was where you wanted to be. Now that the shit storm has abated and there's pennies from heaven again, you will notice the price of oil steadily increasing. You will also take note of the quote above by the OPEC oil minister, that this is almost purely because of speculation. There's a butt load of supply and demand is at a stasis.

theoakman says

No it doesn’t. Deflation has 2 definitions in economics. Keynesians and Monetarists refer to deflation as falling prices. Austrian economists refer to it as the contraction of money supply. Keynesians and Monetarists believe deflation (falling prices) leads to economic slowdown (Ben Bernanke’s thesis). But it doesn’t. In fact, at the end of the 19th century, we had nothing but a booming economy with falling prices throughout.
Deflation doesn’t mean the economy is slowing down. Falling prices can be a product of increasing supply through productivity. People always like to point to LCD TVs as a “sign of deflation”. Well, LCD & Plasma TVs used to cost 10 times more than they did at the beginning of this decade. Yet, as the price has come down, much more people have been employed selling and manufacturing LCD TVs than before. People buy more goods as prices come down. That increases employment.

Yes, LCD TVs have enjoyed strong productivity as they have gone from zero sales to a high percentage of the market. This is partially due to economies of scale and partially due to technological advances. Unfortunately, a great percentage of our economy is made up of mature industries where productivity gains are much harder to come by. Any price declines in those industries would have to be offset by layoffs--there would not be enough productivity gains to enable the companies to survive.

roftatupu70 says

theoakman says

No it doesn’t. Deflation has 2 definitions in economics. Keynesians and Monetarists refer to deflation as falling prices. Austrian economists refer to it as the contraction of money supply. Keynesians and Monetarists believe deflation (falling prices) leads to economic slowdown (Ben Bernanke’s thesis). But it doesn’t. In fact, at the end of the 19th century, we had nothing but a booming economy with falling prices throughout.
Deflation doesn’t mean the economy is slowing down. Falling prices can be a product of increasing supply through productivity. People always like to point to LCD TVs as a “sign of deflation”. Well, LCD & Plasma TVs used to cost 10 times more than they did at the beginning of this decade. Yet, as the price has come down, much more people have been employed selling and manufacturing LCD TVs than before. People buy more goods as prices come down. That increases employment.

Yes, LCD TVs have enjoyed strong productivity as they have gone from zero sales to a high percentage of the market. This is partially due to economies of scale and partially due to technological advances. Unfortunately, a great percentage of our economy is made up of mature industries where productivity gains are much harder to come by. Any price declines in those industries would have to be offset by layoffs–there would not be enough productivity gains to enable the companies to survive.

Completely false. We had a healthy housing market for over a decade with houses selling at half the price of what they were in 2005. Price declines, in these cases, reflect the dire need for the economy to shift production into a different sector. Housing related employment was completely over bloated and the only way the market can correct this imbalance is with lower prices. Price declines aren't the problem. They are the solution.

By the way, about 200 years of American Economics from 1700 to 1925 proves this idea of a deflationary spiral to be completely false.

theoakman says

Completely false. We had a healthy housing market for over a decade with houses selling at half the price of what they were in 2005. Price declines, in these cases, reflect the dire need for the economy to shift production into a different sector. Housing related employment was completely over bloated and the only way the market can correct this imbalance is with lower prices. Price declines aren’t the problem. They are the solution.

huh? Not sure what you mean about the housing market. You mean prices were less before 2005? Yes, of course they were. It's not a decline if prices rise over time...

Sometimes price declines are the solution. In one sector of the economy as you say. But, deflation in the whole economy is bad.

Most of the members of Opec want higher prices, and want to put the blame on others when it happens. The only Opec country that I know of that actually wants prices low is Saudi Arabia, and even if they quoted what Opec said, they would have their own views. What they say and do are two different things unfortunately, it takes some knowledge and skill to fully understand what they are saying most of the time. They are friendly to the west, but also hate the west. They are friendly to many other arab countries as well. They're the friend who tries to please everyone, by telling them everything they want to hear. So using any quotes from them, or Opec I'm always suspicious of.

I wouldn't say LCD's deflated in price, they came down due to technical advances, not due to deflationary pressures. Computers don't "deflate" in price either, I don't have an economic term for how computer pricing behaves, but saying deflationary sounds just wrong. I'm sure someone could point out the technical reason for it.

At this point in the economy, we've really removed most of the fat from most businesses. Other countries still don't have the same competition as the US has, but we're essentially down to the bare bones for most stores. Mistakes put companies out of business here. 10% might be a healthy profit margin, but that's also includes a business performing perfectly. Other countries might yield 10% as well, but those businesses are making huge mistakes that are costing them dearly. Mistakes might include advertising in the wrong places, buying the wrong products, hiring the wrong people, etc. One big advantage expats say they have in other countries when starting up businesses is that they can make mistakes and still survive, while their counter parts in the US go under. One bad mistake in the US and you're gone, while it can take multiple mistakes in other countries to really take a business out.

Because of this, I don't see deflation happening in the US, unless it comes at the expense of wages. Raw materials, and construction costs simply can't be reduced further here. Deflation would be pretty harsh if it happened here.

actually, raw materials and construction costs have deflated hugely! drywall, lumber, concrete all have dropped since 2005, and today, electricians and framers are begging for work. The cost to build a home for a builder in Phoenix is down 20 to 30%, before even considering that land prices have plummeted. We are seeing builders buy up approved leveled lots for less than the costs of the improvements, and place homes on them they can sell profitably at 130K. New 3/2 1400 sq ft with 2 car garage and a yard, they can compete with the foreclosures presently.

azrob00 says

actually, raw materials and construction costs have deflated hugely! drywall, lumber, concrete all have dropped since 2005, and today, electricians and framers are begging for work. The cost to build a home for a builder in Phoenix is down 20 to 30%, before even considering that land prices have plummeted. We are seeing builders buy up approved leveled lots for less than the costs of the improvements, and place homes on them they can sell profitably at 130K. New 3/2 1400 sq ft with 2 car garage and a yard, they can compete with the foreclosures presently.

Of course they have. We are just towards the end of a bad recession. If you like the way the last two years played out, then you'll love deflation.

deflation over a long period is very bad. I'm just very unhappy with how the govt (both bush and obama) have handled this: try to bailout the status quo. We have wasted a ton of money on gimmicks that won't help at all, and bailing out the very people who caused the problems: the worst banks, the worst home buyers.

Instead, had we spent our deficit spending on say modern nuclear power, public transit, whatever, anything that will help this country economically in the future, and created jobs now, it would have made much more sense.

Bailing out failed banks, bailing out homeowners who will eventually default, giving credits to get people to buy a home are all gimmicks. Gimmicks that make it appear we have turned a corner, but fundamentally nothing has changed.

inflation is defacto devaluation for foreign lenders without the embarassment of formal dollar devaluation