[Marxism] Speculation, Re: WSWS "The world food crisis and the capitalist market"

Ruthless Critic of All that Exists ok.president+marxml at gmail.com
Fri Jun 13 04:55:25 MDT 2008


On Wed, Jun 11, 2008 at 12:41 PM, Jerry Wells <jeremy at infowells.com> wrote:

> Part 2  http://www.wsws.org/articles/2008/jun2008/food-j09.shtml
> "The central problem underlying the current food crisis is not a
> physical lack of food, but rather its unaffordability for masses of
> people due to rapidly increasing prices. Among the immediate factors
> driving the rapid worsening of the food crisis, a major role is played
> by the explosion of speculative investment in basic commodities such as
> oil and grain, itself bound up with the difficulties facing US and world
> financial markets and the decline in the US dollar. Rampant speculation
> by hedge funds and other big market players has increased costs,
> encouraging private firms to further bid up prices in a competitive
> drive to amass as much profit as possible."

There was an article in the New York Times today which says that
"people with years of knowledge about how commodity markets work" are
worried about the increasing antipathy towards speculators, which,
they say, is misplaced.

Unfortunately I don't know enough about finance or commodity markets
to judge this issue. But I am sending this article on in case others
would like to comment. Is the article an instance of bourgeois
prevarication, or is there any substance to it?

New York Times
June 13, 2008
A Bull Market Sees the Worst in Speculators

By DIANA B. HENRIQUES
In Washington, financial speculators have fat targets on their backs.

They are being blamed for high gas prices, soaring grocery bills and
volatile commodity markets, and lawmakers are lashing out at market
regulators for not cracking down on them more vigorously.

"You study it, but you don't act against this incredible increase in
speculation," Senator Carl Levin, Democrat of Michigan, complained to
a senior official of the Commodity Futures Trading Commission at a
recent Senate hearing. "Unless the C.F.T.C. is going to act against
speculation, we don't have a cop on the beat."

Just this week, Senator Joseph I. Lieberman, the Connecticut
independent, said he was working on a proposal to ban large
institutional investors from the commodity markets entirely. The same
day, the Bush administration endorsed another Senate proposal to
create a new federal interagency task force to investigate commodity
speculation. At least four public hearings have explored the topic in
just the last two months, and Senator Lieberman will hold another
session on June 24.

Although it is common in tough financial times to blame the
speculators, this escalating hostility toward them is starting to
worry people with years of knowledge about how commodity markets work.
Because without speculators, they say, these markets do not work at
all.

Speculators, people willing to risk their capital in search of high
profits, are central to healthy commodity markets, they say, and
broad-brush restrictions on them could damage markets that are already
under pressure from rising global demand for food and fuel.

Even in Washington, there is widespread agreement that no single
factor is responsible for rising food and energy prices. The hungry,
high-growth economies of India and China are fundamentally affecting
worldwide demand, while uncooperative weather and government policies
on trade and ethanol are among the many factors affecting supply.

Commodities, priced in American dollars, tend to rise in price as the
dollar weakens, making commodities a popular haven for investors
fearful of inflation.

But beneath all these external factors is the simple seesaw of the
marketplace: For every person who buys oil at $130 a barrel, there
must be another person willing to sell at that price — and, odds are,
at least one of them will be a speculator.

Before it was a Beltway epithet, "speculator" was simply a type of
trader in the commodity futures markets. Unlike hedgers — the farmers,
miners, refineries and other commercial interests that actually make
or use the commodities themselves — the speculators, like day traders
in the stock market, are simply trying to profit from changing prices.

Some speculators follow market trends, buying as prices rise and
driving them higher. But others buy when they think prices have fallen
too low, sell when they see prices as too high or place bets that pay
off only when prices fall.

The more money that speculators are willing to put to work in the
market, the more liquid it is and the easier it is to buy and sell
without causing big ripples in prices.

Any trader, speculator or hedger can try to manipulate markets, of
course. But with tempers rising along with food and fuel prices, some
market scholars are concerned that speculation, the legal pursuit of
market profits, is becoming a synonym for manipulation — secret and
collusive trading activity aimed at deliberately moving prices to
produce illegal profits.

As political pressure has grown, regulators have stepped up their
demands for more detailed trading information from commodity
exchanges, to improve their ability to monitor trading.

In a statement this week, Walter Lukken, the C.F.T.C. chairman, said
the commission was determined to see that commodity prices were set
"by the fundamental forces of supply and demand, rather than by
abusive or manipulative practices."

The commodity market has seen its share of manipulation scandals —
allegations that executives at J. R. Simplot had tried to fix the
Maine potato market in 1976, allegations that the Hunt family of Texas
had manipulated the silver market in 1979 and, just last year, BP's
settlement of federal charges that it had manipulated propane prices.

Certainly, there have been unusual price spikes in commodity markets,
like the short, sharp roller-coaster ride that hit the cotton market
in early March and the more recent gyrations in the oil markets that
have alarmed some market participants.

While commodity market regulators regularly look for manipulative
behavior, the C.F.T.C. took the unusual step in recent weeks of
publicly confirming that it was conducting investigations looking for
illegal activity in both the energy and agricultural markets.

"Concern about manipulation is not misplaced," said Patrick Westhoff,
an economist at the University of Missouri's Food and Agricultural
Policy Research Institute. "But speculation doesn't equal
manipulation, and I am concerned that there's been a confusion between
the two concepts."

The stage of the speculation that is alarming Washington is the
commodity futures market, which trades a financial derivative called a
futures contract, an agreement for the future delivery of a fixed
amount of a commodity at a certain price. The prices at which these
futures contracts change hands are the benchmark for pricing
commodities around the world.

In essence, speculators are the only voluntary players in the
commodity futures markets. They could use their billions to dabble in
currency markets or buy distressed real estate or pile up Treasury
bonds.

But farmers, miners, oil producers and all the other players engaged
in commodity production and consumption — the so-called commercial
players — pretty much have to be there. There just are not many other
places they can hedge the price risks that arise in their
commodity-based businesses.

So speculators become the ballast in the market, making the contrary
trades, taking on the risks the hedgers want to shed, reacting quickly
when news jolts the markets and, most important, creating liquidity by
pouring in enough money to allow everyone to make very large trades
quickly without causing wild price swings.

Liquidity is, in effect, the hostess gift that speculators bring to
every market party, and without the capital poured into energy markets
by institutional investors, prices may well be far higher and more
volatile than they are, said Philip K. Verleger Jr., an economist and
energy policy consultant who testifies frequently before Congress on
energy issues.e speculation."

[...]

But Congress has to "define and legislate that definition better," he
added. "We can't just say, as Justice Potter Stewart once said of
pornography, that we know it when we see it."

Full: <http://www.nytimes.com/2008/06/13/business/13speculate.html?ref=business>




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