On Thu, 17 Feb 2011, brad wrote:
> As Doug said speculative futures purchases dwarfs actual
> physical commodity transactions. That is how futures drive up the
> spot, by creating a consistent and predictable contagion futures
> market.
You lose me at "that is how." What's the causal mechanism?
If speculators were buying actual assets, then I would understand. If money pours into stocks, or bonds, or housing, then the price of those assets has to go up.
And if speculators were similarly buying up grain or oil, then of course the same thing would happen.
But futures aren't like that. At least theoretically you can pour in infinite amounts of money without affecting the price of the commodity whose future you're betting on. And without even driving up the price of the futures. Theoretically the huge money could be betting on something to go down.
I'm not saying the influx of money into commodity futures didn't drive the real price. I'm perfectly willing to believe it did -- as soon as I get an explanation of how.
Like I said, I've got my own suggestions. But if there isn't a problem and I'm just missing something, there's no need for new ideas. Tell me what's obvious that I'm missing that everybody knows. In particular, tell me why increasing the volume makes a difference.
BTW, I'm even willing to accept as a hypothesis that it happens and we don't know how and need to do research. To take a similar example, the standard economic model suggests that raising the minimum wage will raise unemployment. Research shows that doesn't happen. That seems pretty clearly established. Now people are working on explaining why, and have come up with some good reasons (though it's still an area where more research can be done).
Similarly with an influx of immigrants driving down wages -- the model says it should, but in fact it generally doesn't -- in fact it often goes the other way.
But in both cases it's only possible to make progress once we're clear that the facts seem to contradict the model of how economics is supposed to work and that there is no obvious counter model yet at hand and more work needs to be done -- in short, that it isn't at all obvious.
Something can be true without us understanding it.
Michael