In Defending the Undefendable, Block states “The oft-quoted objection remains that the speculator causes food prices to rise. If his activity is carefully studied, however, it will be seen that the total effect is rather the stabilization of prices.” He explains how in times of plenty the speculator buys and stores food, which increases prices, but in times of famine, he releases the food on the market, thus driving the price back down.
Was this the case when oil reached $140 barrel a few years ago? Or did the speculators actually contribute to the high prices (and possibly the low when oil took a dive afterwards)? Talking heads such as Bill O’reilly claim there is evidence that the high prices were related to speculation, and that the prices went beyond supply and demand.
If so, does the speculator have the opposite effect of stabilization? That is, did he cause the price to go higher than it otherwise would have been, and also lower than it would have been when he dumped the oil back on the market? This would not appear to be stabilization.
I don’t think they always stabalize prices, from what I understand they do accelerate price adjustment. So they help push up the price faster and bring it down faster. So I guess you can say they push it towards stablization?
Of course speculators influence prices, that is the point of speculation. Block argues that the net (total) effect of speculation is a sort of pseudo-equilibrium.
Bill is an economic ignoramus. Obviously, if speculators are buying oil futures, that is demand. High prices create increased capital investment, which in turn increases production, diminishes consumption, and after some time… ta da! … brings lower prices.
Reason it through, step by step. When you do, the answer will become obvious. If you aren’t sure, then ask a question, but it seems to me you haven’t actually considered Block’s argument, or the effect of speculation on prices over time.
X = Amount of money speculators are using to trade for, say, oil stocks.
Y = Amount of newly created money by the Federal Reserve.
Z = Fraction of that newly created money going to speculators through investment banks.
The new supply of money chasing those commodities is now X+Z. It’s only natural that prices rise. But who’s to blame, the speculator or the Fed? I think it’s clear that the answer is: ‘the latter’.
First, what is the evidence? How does he know what supply and demand would have done? Can he read minds? Demand curves are not something you can actually look up someplace. They are mere guesses.
Second, why is a speculator somehow excluded from the laws of supply and demand? His demand is just as legitimate as anyone elses.
Third, speculators who are willing to pay a high price are betting that there is going to be a steep rise in prices, and so are willing to pay a bit more now. There are two possibilities to examine. Either they are right, or they are wrong.
If they are right, and there are forces at work that will make prices go up, then they are the caboose, not the engine. They are not making the price go up, by assumption.
If they are wrong, then they are going to lose a lot of money, and the price will go down as well. So what exactly is the problem? They are going to get punished, the market price that they perhaps raised artificially for a short time is ephemeral, everyone is happy but those villians.
“Was this the case when oil reached $140 barrel a few years ago? Or did the speculators actually contribute to the high prices (and possibly the low when oil took a dive afterwards)? Talking heads such as Bill O’reilly claim there is evidence that the high prices were related to speculation, and that the prices went beyond supply and demand.”
If it were true that speculators were driving the price of oil up higher than the demand of only consumers then there would have been an enormous “stockpiling” of oil somewhere as supply was greater than demand. However, as far as we know, at least, there wasn’t any massive oil accumulation when the oil prices were skyrocketing, consumers purchased all of that oil. So O’reilly is clearly wrong.