Wednesday, April 20, 2011

Oil Futures Speculation and the Spiking Price of Gas

The business pages agree and now even the President is chiming in, although it seems the establishment mainstream press tends to avoid publicizing these discussions.   How can the price continue to rise even when surpluses continue to stockpile? [***see below for relevant news***]  According to the theory of supply and demand, when there is an over-supply, prices are supposed to fall...
Ed Wallace in Business week says "It's no secret that speculators are driving up fuel prices. ...  It's no great mystery who is responsible for higher gas prices. As I and others have written in the past, the biggest culprits are the speculators gaming the futures markets to line their own pockets. We know all that."
Huh, maybe no secret to him, but definitely a secret from most of the American public, who blame oil company greed for expensive gas. 
Even Goldman Sachs is alarmed over the inflating bubble in oil speculation:  "Goldman Sachs advised its clients on Apr. 11 to get rid of their commodities holdings, including oil. The Guardian quoted Goldman's advice as warning: 'The record levels of speculative trading in crude have pushed their prices up so much in recent months that in the near term, risk reward no longer favors holding those commodities.' "
Wallace ultimate pins the blame on the easy money policy at the Fed, which is flooding the world with cheap dollars, enabling and encouraging financial speculators to pump up bubbles in commodities:

"The problem starts with Ben Bernanke, no matter how many of his Fed presidents claim they are not to blame for the high price of oil. The fact is that when you flood the market with far too much liquidity at virtually no interest, funny things happen in commodities and equities. It was true in the 1920s, it was true in the last decade, and it's still true today."

In the end, it comes down to creating big profits for banks at the expense of the American citizens, because banks need the profits to pay off the bailout loans that the fedgov gave them:

"Ben Bernanke doesn't seem to understand that while he is allowing huge profits for banks and investment firms so they can recover massive losses from the financial meltdown, he is intentionally damaging what could be a much stronger recovery with the misery he's causing the average American consumer. Maybe he does understand and just doesn't care. There's always China to blame."

[read the whole of Wallace's article here:]


The Law of Supply and Demand Drives Futures Markets Too

The President characterizes the futures contracts as "bets", which is the standard interpretation and justification for these things.  The problem is, the financial elite don't "bet on the market", in the same way that a small dealer is betting when he takes out a futures contract. 

Rather, the financial elite are driving the market, because of the tremendous amount of money they can bring to bear.   When they issue a buy order, the money flows in.   The greater money inflow drives up prices. 

When you have the billions in free money, you can move the market like that.  It is like a money-making machine.  When they issue the sell order, the prices will automatically fall, because they represent such a huge market stake. 

An organized movement to rein in the madness can be found here:

Stop Oil Speculation Now

Obviously, financiers should not be allowed to speculate in markets like this.  It should be made illegal, no exceptions, with harsh penalties for those who attempt to profit like parasites on people's need for basic commodities like food and energy.   Only people with legitimate economic interests in a market, i.e. the producers, retailers, and consumers, should be allowed to purchase futures contracts to hedge their financial positions.   


***The oil minster of Saudi Arabia, for example, points to the large surplus in oil production and stockpiles:

"Saudi Arabia's oil minister says the current high oil price is unjustifiable and that speculation over the future oil markets is mainly behind the hike.  Ali Naimi told reporters the lower demand for Saudi oil in March compared to February was a sign of an existing surplus on the global market.  He says large quantities of oil were available as commercial stockpile or surplus production in some oil-producing countries. Naimi spoke after a meeting on Tuesday with Dutch Economic Affairs Minister Maxime Verhagen.  []

Wednesday, April 13, 2011

Banks Should be treated as Public Utilities - Thomas Hoenig, KC Fed President

The analysis that banks are public utilities is a very basic and honest one.   Of course they should be regulated as one, as suggested by Kansas City Fed President Thomas Hoenig (  
The situation with banks is actually worse than with utilities.  Utilities at least provide something of value for the economy.   Banks provide none, they are totally 100% parasitic.  Profit to a bank is a direct loss to someone else. The more profits a bank makes, the more in debt the rest of productive society is.   Growing profits in the banking sector should be looked with alarm, like a growing colony of parasites on a healthy body.  If it is not controlled, the body could die, as we are seeing in our current debt deflationary episode.   Because the economic interests of banks are diametrically opposed to the economic interests of the productive economy, the whole banking sector should be regulated very carefully, with strict caps on usury and profits. 
The Outdated Theory of Banking Utility
The economic utility of banks supposedly resides in their ability to bring together the supply of unproductive capital with the demand of creative business ventures.   Indeed, that logic had value back when money consisted of gold, and the economy suffered from the pressure of constant money shortages.   
However, such a situation no longer applies.  Banks don't make profit because they are agreeing to take on the risks of making loans.   Today, banks make profit from CREATING MONEY through loans.   It is money they never had in the first place, so they certainly aren't risking anything by giving it away.   The money is literally created in the process of issuing the loan.   
Thus, the banks are in a NO RISK position.  If the loan goes bad, they lose nothing, since they ventured nothing in the first place.  If fact, they may gain something, if the loan was secured by some real collateral (such as real estate) and they get to seize and resell the collateral if the loan fails.    The only so-called "risk" they face is if their books get so far upside down that they can no longer meet their deposits, and in that case, the bank is simply nationalized.
The Fractional Reserve Scam
This is the fundamental lie and scam at the heart of fractional reserve lending.  Under the "10% reserve requirement", supposing you have $100, you can lend out $500 to your mom, $300 to your dad, and $200 to your sister, while getting to hold on to the original $100!    This is a far cry from the old days, when banks faced actual risk with a limited and real supply of money. 
Under the old system of real money, if a bank lent out that $100, if the loans went bad, they could be wiped out, along with their depositors.   Note that the gold piece money still existed somewhere.  In other words, society still had as much money, but the particular bank would be wiped out.   This created an iron discipline in the banking system, creating competition in an environment of real risk.   This risk was very real and personal to the bank owners, because it was their personal capital that was at risk if the bank was wiped out.
Perversion of Capitalism
Today, the risk profile has been inverted.  Under the Fractional Reserve System, banks can never actually be wiped out.  At the last resort, the Federal Reserve jumps into the picture, takes ownership of the bank, and creates the money to honor the deposits.   The owners of the bank do not face bankruptcy in this scenario, either, since their personal wealth is shielded away from the performance of the corporation.  
Society as whole might be wiped out by inflation or deflation, but banking deposit accounts will always be made whole, and bank owners face no personal risk.  In other words, in good times, banks make all the profit while taking no real risk.  While in bad times, they are bailed out by the government.  Profit is privatized, loss is socialized.  This is not your grand-daddy's "capitalism". 
That is why banks are essentially agents of the government.  They are not truly private enterprises, facing free and open competition, under the threat of being put out of business and personally impoverished by bad decisions.    Their ability to make a profit is based on a government-protected monopoly in money creation.  If they mess up, the government has to bear all their losses.   Heads they win, tails you lose.   Nice time to be a banker, no? 

Tuesday, April 12, 2011

Don Baker calls for National Debt Repudiation - the Jubilee plan revisited

The irony here is that I was pointing out the necessity of Jubilee two years ago on Seeking Alpha, and I got lots of thumbs down.  Now major articles are being published there agreeing with me (
Jubilee is totally logical and practical.  Debt is killing the economy currently, and it is only going to get worse.  The sooner we declare the Jubilee, the better off our real economy will be.  The longer we wait, the more severe will be the recovery. 
To be precise, the Jubilee plan is different than default.   The Jubilee plan means that all debts are PAID OFF.    The government simply writes electronic checks to pay off all debt.  
Simultaneously, the government raises the banking reserve ratio, to soak up all the extra liquidity. 
The result: the cancellation of all debts, without the violation of any contracts, without any inflation.   
The debt deflation would be over instantly, and the economy could reset.   Jubilee!

Should government be prohibited from borrowing - from the Adam Smith Institute

An article over at the Adam Smith Institute (   questions the utility of government borrowing.   Clearly, a prohibition on government borrowing should be written into the Constitution as a hard limit on government.
Government borrowing is a moral wrong: no men have the right to set debts upon their children and grandchildren.    It is functionally equivalent to hereditary slavery.  It is wrong. 
The very idea of sovereign powers needing to borrow is absurd.  If you can create new money at will, why would you ever need to borrow?
The practice of government borrowing from banks is simply a scam that the banking elite has perpetrated: it amounts to a permanent transfer of wealth from the nation to the banking elite.   It is functionally equivalent to a tax or tribute payment.   Old habits die hard: the parasitic elite still acts as if it has the right to leech off the nation's wealth.
If government needs extra money, it can just print it out, plain and simple.    The idea of government borrowing from banks is archaic and retrograde, a relic of a previous barbaric age when people believed a nation's wealth was defined by its gold supply.