Thursday, April 19, 2012

Quote of the Day: Donald Boudreaux

From a letter to the New York Times on oil speculation:

You speculate that “excessive speculation, mainly by Wall Street index-fund traders, is needlessly driving up [gasoline] prices” (“Speculators and the Gas Pump,” April 19).

Speculative buying is excessive only if it pushes prices higher than will be warranted by tomorrow’s conditions. But no one – not even the academic authors of papers to which you link – knows for certain just how tight gasoline supplies will be tomorrow. Many investors are speculating that these supplies will be very tight indeed. If these investors are correct, they’ll earn profits and their purchases today will be revealed tomorrow not to have been excessive.

You, in contrast, insist that these speculators are mistaken (that is, you think they’re destined to lose money on their investments). So put your money where your mouth is: invest contrary to these speculators by going short in gasoline. If you’re correct that today’s speculation is excessive, not only will you make a killing when proof of your prescience arrives tomorrow in the form of gasoline prices that are lower than are expected by the speculators who you criticize, you’ll also put downward pressure on today’s gasoline prices.

Rather than opine with no skin in the game, get involved! Show the world that your intellectual speculations aren’t idle.

~ Don Boudreaux, Stakeless and Idle Yammering

Jeffery Neal, of the University of Virginia responds:
Professor, While your point is mostly accurate, I remind you that there are already traders who have taken the short position you recommend to the NY Times. For EVERY long position there must be a short position, else there is not trade or transaction. Those who suggest that speculators are driving up the price of a commodity presume that there is a knowing dunce on the short side of the trade who is willingly, voluntarily and intentionally losing money so that the speculators on the long side can make their ill-gotten profits. Otherwise, if "everyone" knows that the traders speculating in the long position, none of 'everyone' would be taking the short position, would they? And, in that case, there is no trade... until the market's bid/ask process finds the strike price at which there is a short/long equilibrium and the trade happens... and the strike price moves up or down instantaneously and constantly all day every day of trading.

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