Samuelson on Why We Should (Not) Shoot the Speculators

Who are these offensive souls? Well, they often don’t fit the stereotype of sleazy high rollers: Many manage pension funds or university and foundation endowments.
… [Commodity investors] generally don’t buy the physical goods, whether oil or corn. Instead, they trade “futures contracts,” which are bets on future prices in, say, six months. For every trader betting on higher prices, another is betting on lower prices. These trades are matched. In the stock market, all investors (buyers and sellers) can profit in a rising market, and all can lose in a falling market. In futures markets, one trader’s gain is another’s loss.
Futures contracts enable commercial consumers and producers of commodities to hedge. Airlines can lock in fuel prices by buying oil futures; farmers can lock in selling prices for their grain by selling grain futures. The markets work because numerous financial players — “speculators” in it for the money — can take the other side of hedgers’ trades.

Samuelson’s Conclusion: “If politicians wish to point fingers of blame, they should start with themselves.”


11 thoughts on “Samuelson on Why We Should (Not) Shoot the Speculators”

  1. The ignorance and demagoguery on this topic lately have been remarkable. Even many defenders of free markets do not understand market basics (e.g., the WSJ had an editorial last week that appeared to confuse futures and options). It’s obvious, again, that many journalists are not only ignorant about the topics they confidently opine about, they are too lazy to do even a few minutes of online research, much less actually read books on the relevant topics. (Anti-speculator comments by conservative bloggers reveal that they are not immune to the same errors.)

    Samuelson stands out for knowing what he is writing about and for doing his own thinking. That these qualities, which should be minimal requirements for journalists, are exceptional shows how shoddy most journalism is.

  2. I think that most people use land speculation as their model for how future markets work. The land model fails because land can be “stored” in a sense whereas most goods traded on futures markets cannot be stored long term on any large scale.

    Speculators can drive up the price of land because the cost of holding the land out of the market is relatively low. For example, people hold large areas of undeveloped land for years and years waiting for cities to grow out to them. No one can do that with oil. Economically significant amounts of oil can only be stored in the ground. In other words, to hold oil out of the market, you just don’t pump it out of the ground. Once you pump it, you have to get rid of it by adding it to the supply stream. Worse, it takes 90 to 120 days or more until the oil reaches the end user.

    American speculators have no means of controlling foreign pumped oil almost all of which is under national control of one country or the other. The cost and infrastructure of domestically produced oil make leaving oil in the ground that one could otherwise sell for a profit a very risky enterprise. If price conditions change, the time it takes to get the oil to the end consumer means the producer will not be able to sell enough oil to make up for the money he lost waiting.

    So, oil future prices do not rise because people keep oil out of the market the same way they would with land. Instead, oil futures prices rise because the consumers of oil believe that prices will rise. They pay a premium today to lock in a price for tomorrow.

  3. The ignorance and demagoguery on this topic lately? For ever. Speculators, or providers of liquidity to market principals as I prefer to think of them, have been reviled for centuries. What has happened lately is that a sizeable minority has come to understand their function and value as economic literacy has increased, however slowly.

  4. Yes, forever. And it returns whenever commodity prices increase. I had thought economic literacy increased over the past couple of decades. It’s a bit of a letdown to be reminded (again) how few people have a clue about such issues.

    Who among us thought it likely that a socialist would be favored to win a US presidential election?

    There may indeed be progress in this regard, but if so it appears to be a case of 10 steps forward followed by 9 back.

  5. At least we don’t have a socialistic nationalist who demagogues nalefactors of wealth.

  6. I don’t mind ‘speculators’ if they use their own capital. However, if they’re playing with low margins and do not have the capital to back it up except other paper that is in turned tied to even more paper, when you’re dealing with material critical to whole economic system, you’re asking for it from the politicians on behalf of their constituents who are going to be asked to pick up the mess. Bailouts on the back of the people or devaluing the currancy by inflating the market with more paper money says to many that if I’m going to be stuck with the dirty end of the stick, I’d better have a say in the process.

  7. In that case why not blame the Fed and politicians, whose policy errors are responsible for devaluing the currency? They caused the problem. Speculators are scapegoats.

    Blaming speculators for inflation is like blaming surfers for tsunamis.

  8. Note well – I don’t mind ’speculators’ if they use their own capital.

    In which case, all the power to them.

    However, the bailouts and dumping of the money on the credit markets happen after, not before, the speculators where caught in the property market having played with paper and not real capital.

    Let me bend your analogy….is like blaming skiers for the avalanche.

    Strangely enough, some skiers by their behaviors do trigger avalanches.

  9. It’s a false analogy. Unlike skiers whose presence may cause avalanches, market trends occur whether speculators participate or not. Moreover, speculators moderate market trends by providing liquidity. You are trying to elide the issue by suggesting that a speculator who exploits a financial trend is using other people’s capital merely by taking a market position. This is nonsense. Speculators risk, and often lose, their own money. The people who make rash bets using other people’s money are called politicians and central bankers. They are the people who have been inflating the currency, who created the idiotic ethanol program that has doubled and tripled grain prices, and who block domestic oil production and refining.

  10. “Speculators risk, and often lose, their own money. The people who make rash bets using other people’s money are called politicians and central bankers. ”

    Fine. Call margin. We’ll see who’s using who’s money.

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