I've written a long winded piece in response to Stephen's statement
about futures/commodities speculation, so hit the delete button if you
don't want to read non-Tiger content.
Steve Sage
Hello Stephen:
I usually don't like to get into a financial or political discussion on
our list as it may be inappropriate for all of us Tiger nuts, but this
needs clarification. You are wrong about thinking that restricting or
outlawing commodity speculation would be a good thing.
Individual investors/speculators take the risk out of the market for the
big institutional investors. Those big guys hedge and speculate so they
can be sure of the net price they will pay for their raw materials for
their production (whatever their product is) in the future. The smaller
investors/speculators take the losses if prices go the wrong way for
them, but of course also make money if prices go their way. Those
millions of small "speculators" around the world take the risk out of
future production planning for the companies that make the products we
buy. The big companies/institutional investors who make the things we
buy often hedge their futures trading so that if prices go their way
they may make a little money, but also if prices go the wrong way they
won't loose too much, and can stay in business and plan for the future.
Those big institutional investors are not in the futures markets to make
a bundle. They usually don't. They loose just as often. They are in so
they can plan for stable pricing for their future raw materials
purchases. Averaged out, the millions of small investors/traders do
sometimes make a lot of money, but they often loose as much as they
gain. I don't want to go on for pages but futures/commodities trading
does in fact keep prices pretty stable, and just as important prevents
shortages. The old communist world had very low, government mandated
pricing alright. There just usually wasn't anything on the shelves to
buy with your rubles. If you took away the speculators, there would be
no money in the markets for the big institutional investors to hedge
against.
There are always short term exceptions, like oil prices being driven up
to $150 a barrel last year. When that happens, everyone calls for a big
investigation to investigate the "evil oil companies". However, oil
companies largely don't set the price of oil, the free market does. Now
that oil is down to under $50 a barrel, it's "funny" that I don't hear a
single call from anyone to investigate why prices are way down. It must
be some kind of conspiracy, right? In truth, lots of traders have lost a
bundle betting prices would keep going up. If they're willing to take
the risk, they have to have the chance of making a profit too.
The first futures/commodities market was stared in Europe in around 1100
AD, for exactly the above reasons. It's worked pretty good for the last
900 years, so I think I'll stick with it.
Steve Sage
Stephen Waybright wrote:
>
> My economics learning: speculative investing (not to be confused with
>hedging) can destroy the free market system and should be tightly regulated
>(if not flat out prohibited on commodities).
>
> Stephen Waybright
>
>
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