It was Kevin Phillips, in his superb book, Arrogant Capital, who first noted that whenever an empire or nation is in decline it is speculation that takes precedence over all else and dictates its economy. Such was the case with the 16th century Dutch, as with the British at the end of the 19th century. It is as true today in the U.S.A.
The problem is that speculative enclaves are mostly hidden away from public view, so they are able to conduct their shenanigans beyond the scrutiny of the public mind. G.P. Brockway (The End of Economic Man, Harpers, 1991) has noted that before about fifty years ago one had roughly equal 'productive' and 'speculative' economies based on Main St. and Wall Street, respectively. Real productivity kept growing because real investment was made in hands-on materials, plant, research and labor. Most everyone benefited, including workers - via real (defined benefits) pensions (not '401ks') as well as higher wages, and companies that produced REAL goods.
Sometime after Reagan was canonized, in the 1980s, the speculative economy - which up until then had been kept in the background- began to take control. Much of this became possible through de-regulation, especially of the banking system. The effect was to shift enormous volumes of capital from Main Street to Wall Street.
Now, as oil prices spike to unheard of highs, attention once more has turned to the commodity "traders" .....errr....speculators. By some independent estimates, up to 30% of the current per barrel price of oil is due exclusively to speculation by institutional traders in the oil commodities market. (Alas, these institutional outfits include pension funds, who put their members future welfare and livelihoods at grave risk especially if the oil prices should crash) If Oil is $140 a barrel, that would mean that minus speculative influence it would descend to about $98 a barrel. And the current $4.10 for a gallon of gas would likely recede to $3.50 or even $3.30.
Of course, the speculators and their apologists and protectors in the media don't wish to hear this, nor do they appreciate the daylight cast upon their activities. In the last week alone, I coiunted no less than eight counter-attacks (in The Economist, The Wall Street Journal and The Financial Times) against those who sought to make speculators "scape goats". Much umbrage was taken and editorial bile spilled, but I saw little to convince me the speculators were the "angels" depicted: the "guardians" charged with controlling things in the futures markets for the public good. To which I say, 'Bah', 'Codswallop!' and 'Humbug!"
Commodities traders, like currency speculators (who drove to Thai baht down causing the Asian crisis in 1998) are a mixture of casino gambler and bipedal predatory cockroach. They don't give two squats about anything or anyone except their bottom line! Indeed, these freaks are piling into the commodities racket precisely because the stock market (their usual casino outlet) is tanking, and they can't make enough on their investments.
To the apologists for the precious little speculators and "traders", I ask you to examine this article ('Oil Above $140 on Libya Threat to Cut Output') which appeared in The Financial Times of June 27th (p. 22). The article led off:
"Oil prices rose above $140 a barrel for the first time yesterday as Libya threatened to cut its oil production and Opec's president warned that priuces could surge to $150-170 this summer"
Then two pragraphs lower (caps are my emphasis):
"TRADERS TOOK THE WARNINGS AS A GREEN LIGHT FOR BUYING AND PUSHED OIL TO A HIGH OF $140.05 a BARREL"
Note, the artricle said TRADERS (e.g. speculators) pushed oil to that high! Not oil companies, not space aliens ....not the supply and demand market, but SPECULATORS in the futures market.
This is an important point, since the speculator apologists always begin their counter rants (and insulting the intelligence of the commodities "commoners") by pointing ot that NO actual physical supplies are being diminished, moved or affected by the traders. But no one said they were!
Much like Enron's shell game in energy trading in 2000, wherein no real kilowatts were generated and moved. Rather kilowatts were shifted on paper and increased costs put on as the transactions crossed particular state lines (say from AZ to CA). In the same way, future costs of future oil are bid upon on PAPER by speculators, and these amount to something similar to an auction bid. The difference is that in the hidden commodity-energy auction, unlike an actual auction for a real barrel of oil at say, Sotheby's- every manjack pays the final bid!
So imagine this room, where dozens of speculators ("traders") are bidding on a future amount of oil. The bidding begins maybe at today's market price, say $139. Then some guy yells out: "I bid $140"! And another bozo in the back yells: "I bid $142!" And it finally ends when some clown in an Armani custom-made pinstripe suit bids "$144".
Does he purchase it? Well, only in a hyperbolic way. You see, rather than paying the full price as a real bidder must, say at Sotheby's, the oil trader has margin requirements in oil futures that are often as low as 5%. This means he need only put up 5% of the total cost of the amount bidded on! Would that all auction bidders everywhere had such a grand deal! Problem is when that oil trader leaves the "auction" room (often thousands of miles away in London at the ICE Futures Europe HQ) all of us non-participants get stuck paying his last bid price wherever we live on the planet!
At the very least, to correct this abomination, the "London loophole" needs to be closed and the same standards for margin requirements applied in NY as across the pond in London. This way, cowboy commodities traders cannot continue to wreak havoc on all of us. An excellent prescription is one now proposed by Rep. John Dingell (D, MI) forcing oil speculators to put up collateral of at least 50% of the value of the energy futures in which they trade. Heck, I'd even make it more: say 80%.
Doing this simple step, as Fadel Ghelt - managing director at Oppenheimer & Co. has noted - could bring prices down to $45 to $60 a barrel. ('Oil Speculation Draws Scrutiny' in The Wall Street Journal, June 24, p. A3) . This translates to $2.25 to $2.50 a gallon for gas.
It is high time that the high priests of the Commodities Futures Trading Commission (CFTC)crack down on the casino operator oil traders and their ilk. It is bad enough that a tanking dollar (because of pusillanimous Fed policies and fear of increasing interest rates in an election year)is causing fuel spikes, but at least we can tame the speculative excesses.
These whackos cannot be allowed to play fast and loose with our economic lives.
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