The Epic Of The Fall - India Symbolically Bans Trade In Soybean Oil, Rubber, Kabuli Chana and Potato Futures

From: h_ninja Date: May 8th, 2008 04:18 pm (UTC) (Link)

Yep- and people here are at least talking about reestablishing oil futures restrictions. I can't find a link, heard someone talking about it on NPR. Apparently at one time the oil futures market was subject to price controls?

(Reply to this) (Thread)

From: pyrtolin Date: May 8th, 2008 05:06 pm (UTC) (Link)

On light consideration, it seems to me that setting a temporary (6 month-1 year) cap on oil prices might be an effective way to get investors to move their money elsewhere, not only breaking the recent price spike we've seen, but simulating other investment areas as well.

(Reply to this) (Parent) (Thread)

From: byzantine_ruins Date: May 8th, 2008 09:09 pm (UTC) (Link)

On light consideration, it seems to me that setting a temporary (6 month-1 year) cap on oil prices might be an effective way to get investors to move their money elsewhere

This is an extremely dangerous policy. You need to be very careful running down these intellectual tracks. They are very easy ideas to formulate, that you can just set a reasonable price for thus and such. They seem very reasonable but let me tell you, the story of people setting just prices is not a happy one full of successes. That is because the price will always get fixed by political considerations and the economics will go out the window.

I have a hard thing to tell you. There are nine times as many people competing for every unit of crude oil now, or there soon will be. The trend is forever up, and quite sharply. Get accustomed to it. Don't cry now because it may double and you will want to save your tears for that.

Also, what you are trying to escape is the inevitable consequences of the dollar printing press. We have had decade after decade of public policy conducted with no concern for financial feasibility. We should have Federal budget about 40% its current size. As a result, the pieces of paper that represented wealth in the game of calvinball known as the US economy are now falling into disfavor.

People are getting the idea that they are just scraps of tissue printed with the laughing face of Alfred E. Neumann because they *are*, and the government *will* just print any number of them to meet its "obligations". What constititutes an "obligation" is based on political considerations, not if if you did well or poorly, or invested smartly or stupidly. Thus the price goes up because the underlying worth of the thing the oil is denominated in is deteriorating; you never know when your buy-in to the US dollar is gonna be diluted by billions upon billions of dollars of play money injected to bail out an investment bank, cap the oil price or allow FHA/FNM/FMC to buy an unlimited number of destined-for-foreclosure mortgages.

A price cap is a price cut if the currency is faltering and people will react to it that way. If you want to solve the problem rather than just pushing it over to a new venue, you need to either raise real wages or lower your use of petroleum.

It isn't dollars or nothing, except here, because we are forced to accept them. Other people are not. Set a price cap in dollars for oil, and you will make oil deals get conducted in euros, and kick the bottom out from under the dollar. Are these deals even made in US bourses? I mean, the quoted futures contract is on West Texas Intermediate dropped off at the Henry Hub. But for Kuwaiti and Saudi trades? Maybe they are priced in offsets of the CBoE WTI quote, but there's no reason the deal has to close in America. Are you really going to do anything other than push all the trade offshore?

Think about it this way, if fixing prices by fiat was as easy as all that, would we have the kinds of complex economies we see today?

not only breaking the recent price spike we've seen, but simulating other investment areas as well.

See, case in point. You have made your very first choice to regulate a market -- just for a minute, right -- and you are already making plans involving the indirect proceeds. But you don't even know if it's going to work yet. This is a great way to get yourself in a situation where you will meet failure by redoubling your efforts and meet the end of the project with its continuation. That is attractive policy, but bad project management.

These are not bad ideas to have -- many people have had them! But they lead into a pitfall.

Edited at 2008-05-09 01:53 pm (UTC)

(Reply to this) (Parent) (Thread)

From: pyrtolin Date: May 9th, 2008 02:46 pm (UTC) (Link)

What I'm trying to figure out, more accurately is a way to diffuse the current externality- oil prices increasing at a rate out of proportion with all other market effects because it's the only thing going up right now, and everything else dropping because it, at best, is a weak investment compared to oil.

If this was happening in an otherwise healthy market it would be one thing, but the current decline surrounding it and being exacerbated by it both from the cost end and the investment end paint this as the exact kind of issue that needs some kind of intervention to resolve before it reaches its natural conclusion. (Plastics, it should be noted, have been getting very poor press, but rising prices there are going to hurt people at least as badly, if not far more than fuel prices because of how ubiquitous they are)

We're in a sticky corner case that, while it will eventually resolve itself, won't do so until after it's dealt a huge amount of economic damage across the board. (Not that some positive things- alternative energy/plastics research, encouraging localized farming, and exposing the ethanol boondoggle, but not enough, I think, to offset the pressure that it's already causing) This self-propelled spiral will eventually crash, but like with the other bubbles, the investors currently in are only paying attention to the short term payout and betting that they won't be the ones to take the fall.

(Reply to this) (Thread)

From: byzantine_ruins Date: May 9th, 2008 06:35 pm (UTC) (Link)

What I'm trying to figure out, more accurately is a way to diffuse the current externality- oil prices increasing at a rate out of proportion with all other market effects because it's the only thing going up right now, and everything else dropping because it, at best, is a weak investment compared to oil.

It's a global market with prices set by competitive bidding. Domestic price controls won't help, and the oil war turned out to be a giant waste that cost us far more than it will ever make back, so seizing some and pricing it as we'd wish seems out of the question.

My advice would be: Tell them to stop printing so many dollars at the Federal Reserve so people stop buying commodities as an inflationary hedge. Tell the president to stop fighting an imperial war right on top of the world's most sensitive oil supply lane. Stop being so dependent on petroleum distillates and byproducts. Come to grips with the reality of Chindian demand for resources to emulate American materialistic success.

Everyone sees a price bubble when the elephant is standing on *their* foot. Take the incentives out, leave the naked longs, and the bubble, if any, will dissipate in short order. If you will keep using roughly the same amount of gasoline at $3.37/gal as at $1.10/gal, then the price you used to enjoy was artificially low and it should have been jacked up long ago.

If this was happening in an otherwise healthy market it would be one thing, but the current decline surrounding it and being exacerbated by it both from the cost end and the investment end paint this as the exact kind of issue that needs some kind of intervention to resolve before it reaches its natural conclusion.

Sorry, have to fall into the "everyone told you it would bite you in the ass someday" camp. If we cave in and control prices, nobody will ever learn, and even if this is a "bubble" it's just a few years in advance of when prices would reach this level naturally. So I say evolve, and let the chips fall where they may. This is just Mother Nature's way of saying, "e tan, e epi tan." If you don't make it, we'll tell your mom you was brave.

(Plastics, it should be noted, have been getting very poor press, but rising prices there are going to hurt people at least as badly, if not far more than fuel prices because of how ubiquitous they are)

I would say transport prices here in non-train-using America are what's going to hurt everyone badly. It won't be long til the truckers are bankrupted, just another couple months.

Edited at 2008-05-09 06:39 pm (UTC)

(Reply to this) (Parent) (Thread)

From: byzantine_ruins Date: May 9th, 2008 10:20 pm (UTC) (Link)

Note: Don't get me wrong, there is an awesome commodities crash in the cards, sort of. Certainly when the new great depression we're heading into kicks in, demand is gonna go in the toilet. China is making all those manufactured goods for who again? They already have making them for everyone on earth factored into the growth plans, it's how they plan to pay off their capitalization debt. Ain't no alternate market for "everyone on the planet" and so we will see depressed output and thus depressed commodities prices through several mechanisms.

But then there comes a period of uncertainty where military-industrial metals will be in high demand, and certain other things will be very scarce because someone has figured out they are the irreplaceable part in an air-defense manufacturing complex and JDAMed the sole mining facilty out of existence.

(Reply to this) (Parent) (Thread)