Monday, March 5, 2012

Will Krugman join the Democrats' "It's the speculators!" chorus?

One of my main contentions with Paul Krugman is that I don't believe the man understands even the basics of Price Theory. Yes, I am sure he can dazzle anyone with mathematical models on the subject, but nonetheless he represents the Progressive Wing of modern academic economics, and I have yet to meet a Progressive that can give me a clear explanation of what happens when prices change.

A number of prominent Congressional Democrats are publicly claiming that "speculation" is responsible for rising gasoline prices. (I guess that their claims are even worse than those of Krugman, who has written in his blog that gasoline prices have gone up because of economic activity in China, and because commodity prices are "volatile.")

Of course, those same speculators were at work when gasoline prices went down, and especially nearly four years ago when prices dropped from more than $4 a gallon in the summer of 2008 to about $1.50 near Christmas that same year. One wonders, if speculation occurs, how it seems that speculators are involved ONLY when gas prices go up.

I will be watching to see if Krugman joins this bandwagon, or if he writes something to the contrary. If he says nothing at all, then he is proving that as a political hack, he will protect the Democrats, even when they wallow in utter economic ignorance.

And, yes, I believe that when we have a commodity that is priced world-wide in dollars, and when the chairman of the Federal Reserve System openly attempts to shower the world with dollars, we are going to see price increases in things like crude oil and gasoline. Oh, and Krugman already has discounted that possibility.


ayassos said...

I believe that when Krugman was dealing with high grain prices last year, he decided that it had to do with a bad harvest caused by poor weather conditions, simply an anomalous event. The money hallucinated by the Fed just sits in the reserve accounts of the Primary Dealers, and because of all the "slack" in the economy, it cannot cause inflation because it never goes anywhere. I suppose the swap lines opened by the Fed late last year to accept any sort of collateral from Europe also found their way to reserve accounts somewhere and not into the real economy, where they might cause inflation in dollar-priced commodities, such as oil. Krugman can come up with explanations more or less on demand, which all share the quality of complete exoneration of the Fed. The Fed can buy as many Treasuries as it likes and Krugman assures us that this has no effect on the "incredibly low" interest rates the Treasury pays on its debt. It's simply our inherent creditworthiness and has nothing to do with the buyer being essentially the same as the seller. The point being in all cases: Keynesianism must be preserved no matter how twisted the logic becomes, and the ability to borrow is the fount from which all blessings flow.

ekeyra said...

Hmmmm I could have sworn I read krugman blaming speculators last time in 08 but turns out he didnt, at least in nothing I can find.

However I agree this will just damn him more if he chooses to remain silent this time. If you lambasted the people peddling snake oil to congress 4 years ago, why wouldnt you lambast congress when they try to hawk the same snake oil now?

Anonymous said...

I think Dr. Anderson is doing us all a service by debunking these mainstream ignotards day in and day out! Please keep it coming!

macroman said...

Anderson: "I have yet to meet a Progressive that can give me a clear explanation of what happens when prices change."

I think you should give us your clear explanation of what happens, so we can get some idea of whether we think "progressives" (was that progressive economists, or just progressives?) would understand it or not.

macroman said...

And when Israel and and a major oil supplier are talking about war and an oil embargo, could that have any effect on the market as well?

Anonymous said...

I'd be surprised if he jumps on the band wagon. Several years ago when the price of oil was high, he repeatedly and emphatically wrote that he didn't believe speculators were a major part of the increase.

In fact, he later he said he thought that, if anything, speculators had a part in the *drop* in prices in 2009.

It's not fair to paint someone with a position they've gone out of the way to speak out against...

Anonymous said...

Speculators were involved in both the sharp rise and sharp fall- in general, the sort of speculation being blamed causes volatility in a market where the spot price is related to the futures price (which is true in oil).

But surely Austrians can agree that the price of oil is at least in part driven by supply and demand. Obviously, if China buys much more oil, but we don't produce much more price will rise.

Similarly, if a worldwide financial crisis slows production in multiple sectors all over the world, demand for oil will drop and the price will fall. Its basic supply and demand, I don't know why would dismiss Chinese demand and speculative demand as part of the basic story of demand.

macroman said...

Anon said: I don't know why [Anderson] would dismiss Chinese demand and speculative demand as part of the basic story of demand.

The answer is fairly obvious. Anderson has only one topic and thought - everything is Krugman's fault and Krugman is always wrong.

Anonymous said...

It's hilarious how Anderson just makes up positions for Krugman. This must be the hundredth time that Anderson attributed the "dastardly speculators" position on Krugman even though I've corrected him several times in the past. But he just keeps on doing it. Nothing will change his mind.

Tel said...

On this occasion I'm coming down on Krugman's side. He has not in the past blamed speculators for high prices (and anyhow, it would make just as much sense to blame speculators for low prices since people will bet on anything).

I do disagree with a few minor details:

"Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.

Any effect on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs."

Sure, but indirect effects are just as important as direct effects. It's a bit like a murderer claiming, "I was not me but the axe wot done it."

That said, even when you consider both the indirect effects and the direct effects, speculators are in it to make money, and they only bet high if there was some reasonable justification for making such a bet. You are perfectly welcome to bet against, if you think the speculators have blundered.

What's more, in a climate of oil price volatility (with potential temporary unavailability on the horizon), hoarding stock is a perfectly rational thing to do.

Dan Hewitt said...

I agree with the previous commenters, who predict that he won't blame speculators based on his past writings.

Here is another link to add to the pile:

Don said...

Yes! Bill Anderson understands prices! Gas prices are high because Uncle Ben is showering the world with dollars and for no other reason.

Of course this ignores the fact that Uncle Ben has been "showering" the world with dollars for the past 4 years, during which gas prices have been as low as $2 a gallon.

Forget the fancy models by all of those ivory tower academics...just listen to Bill Anderson, he really knows his stuff here.

Anonymous said...

@Tel- Krugman is wrong about the specifics of oil, probably because he has never traded in it. OPEC sets their spot price using a model that takes into account the futures prices.

Increasing speculation increases volatility in this case, both on the rise and on the crash.

Mike Cheel said...

So my post got dropped off (I know Professor, you don't delete posts)...

Can somebody address these:

(J Aron \ Goldman Sachs letter)

(Wikileaks Saudia Arabia letter)

macroman said...

If you google "krugman speculators" the most common thing is to find criticisms of Krugman for saying speculation has little to do with the rising oil price.

From reading Krugman, I think by speculators he means those who buy and sell future contracts (those who make a bet on the future price of oil without touching the real stuff).

The online stories of speculation seem to involve people hoarding oil, keeping it off the market, which is different from what Krugman appears to be talking about.

It would help if Anderson would make it clear what he means by speculators and what effect they have on the price of oil.

cali373 said...

Um, does anyone remember a downturn in economic activity n 2008?

Perhaps that was a factor in decreasing oil prices. yes speculators were also working at that time, but they were dealing with a worldwide economic downturn, there predicting more supply would be available, and was.

macroman said...

ayassos said:
The Fed can buy as many Treasuries as it likes and Krugman assures us that this has no effect on the "incredibly low" interest rates the Treasury pays on its debt. It's simply our inherent creditworthiness and has nothing to do with the buyer being essentially the same as the seller.

This seems to be the standard view on this blog (the Fed has caused the present negligible to negative purchasing-power-adjusted interest rate). What I don't understand is how that can be when the Fed holds only about 10% of outstanding US treasury bonds.

The Medicare trust fund and the Social Security Trust Fund hold 39% of the debt. Is that what is meant; these agencies are essentially the same as the Treasury and don't care what interest rate they get or are forced to buy US treasury debt?

China holds 8%. US private investors hold 7%. Japan holds 6%. US pension funds 5%. That adds to 26% held by groups that are perfectly free to sell and invest somewhere safer, if such existed, thus driving up the interest rate.

Mike Cheel said...

No takers huh?

Mike Cheel said...

I would like to see someone in this blog's comment space comment on the J. Aron letter and its repercussions.

I notice certain topics don't get answered here. This is not the first time I have asked about this.

macroman said...

Mike cheel. The rolling stone story about the Saudi blaming speculators looks like the Saudis blowing smoke to me. They claim they can,t increase production because they can hardly sell what they were producing and blame speculators for the high price. Does that make sense.

Mike Cheel said...


I'm mainly curious about thoughts on the J. Aron letter and its ramifications. Is there a refutation for the Saudi position. The reason I give it any credibility at all is because it came from Wikileaks and thus was not something that was meant to be publi knowledge.

Anonymous said...

@macroman- the Saudi's story does make sense when you consider they set the spot price based on the futures market (they are attempting to capture more cash because they know their production is peaking, setting the spot price based on futures allows them to do this without high warehousing costs).

If speculation on the futures market drives their pricing model too high, they will have a surplus they can't sell (price above the market clearing price).

You have to remember that oil isn't quite the same as other commodities markets (to some extent, all commodity markets have their quirks).

Tel said...

Re. J. Aron, the article says it all: "The commodities firms got a guaranteed middleman position that made them a lot of money, and set them up to move the markets and increase the prices paid for commodities from wheat to oil, writes Taibbi."

That's not ordinary speculation, that's arbitrage obtained when one particular firm has a privileged position that their competitors cannot access. Hardly surprising that an uncompetitive market can be inefficient and pay out rent to middlemen.

The real question is how to the Goldman Sachs get into such a position?

Re. the Saudi oil trade and Wikileaks, there's no particular reason to believe Wikileaks are themselves working entirely in the public interest, and even if they were, it seems highly unlikely they can fully trace the chain of custody for their source material. Thus, at least some of the material on Wikileaks must be misinformation and propaganda -- it would be naive to think otherwise.

This particular diplomatic cable might be genuine, but most likely those negotiators would have no incentive to be entirely honest with each other. Of course the Saudis want to find excuses to drive up the price of oil! Of course the Americans want to push for increased production. Dog bites man.