Let’s Blame Speculators

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Here’s a non-rocket science question: If you expect a reduced harvest of wheat, corn, rice or any other commodity some time in the future, what would be the wise thing to do about your consumption today? I bet that the average person would answer: Consume less now so that more will be available in the future.

But how in the world can people be encouraged to consume less now? Enter the futures market, which consists of a worldwide group of millions upon millions of traders, often called speculators. Speculators, betting on a future shortage, buy up wheat, corn and rice today in the hopes of making money selling it for a higher price when the bad harvest hits. As speculators buy more and more wheat, corn and rice, they drive up today’s prices. As today’s price gets higher, people consume less, but more importantly, people do the intelligent thing without bureaucratic edicts. The vital role of the futures trader, or speculator, is to allocate goods over different time periods. And, it’s not just wheat, corn and rice that must be allocated over time but all commodities including oil.

There’s no guarantee that speculators will make money. They might guess wrongly. For example, they might buy wheat now at $8 per bushel, expecting to make a killing in November at $12. Weather predictions might have been wrong and instead of a reduced harvest, there’s a bumper crop driving November wheat prices down to $4 per bushel. That would make the speculator’s $8 investment worth $4.

If we don’t like commodity speculation, we could easily outlaw it. That way, for example, even though there might be every indication of a reduced fall wheat harvest, today’s price of wheat wouldn’t rise. We could consume wheat today and not fret about fall.

President Obama has asked the U.S. Department of Justice to investigate whether Wall Street speculators could be manipulating oil markets.

If Obama could convince other nations to put an end to worldwide oil speculation, we might be able enjoy $2 per gallon gas and ignore Middle East conflicts that might impact heavily on future oil supplies.

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  • Mark

    Walter, I normally love your commentary, but how do you explain the runup in 2008? That was caused by speculation, as then and now there's a glut of oil in the market. Is it a case of the tail wagging the dog, or the dog wagging the tail? However, as the current administration ties up any exploration and drilling for oil in this country, the situation gets worse. Since Clinton's days, the threat is always to open up drilling in this country, but our culture of career politicians seems content to ride the current tension and fear, doing little to nothing at actually moving us into inexpensive and plentiful oil. As long as Wall Street runs the show, we're screwed. The parasites and their enablers are in charge, not the producers.

  • USMCSniper

    Obama is a redistribution ideologue and he like all like him, do not grasp the absolute economic law that only a free market production of goods and services allows for any distribution.