Thursday, February 28, 2008

Are Commodity Speculators Still "Useful"

How timely (see below).
From Cassandra Does Tokyo:

Is speculation in commodities socially "useful"? Do classical economic arguments in favor of unfettered speculation retain their validity?

I have been ruminating upon these related questions questions for a while, composing several aborted missives over the past half-year, but I keep returning to it and would like to throw it out to the crowd for discussion.

I know the classical arguments in favor - as utilitarian risk-transfer devices, as important market-signaling mechanisms, and hence re-direction of risk-capital for investment etc. But my fears linger, essentially wondering whether classical arguments may have significant and meaningful flaws in a modernity where behemoths now-dominate global resource exploitation; where the financial economy is bloated in relation to the real economy; where funds available for speculative activities pose structural hazards as they dwarf the size of the underlying market liquidity, or exchange-traded derivatives markets that often set the prices thereof; where such speculative flows are increasing employing the same techniques (momentum, trend-following etc.) thereby increasing position correlation amongst investors (and thus volatility) resulting in something resembling de facto collusion; where technology opens the Pandora's box for anyone and everyone to join the electronic herd in the [temporary?] stampede for this or that. What, for example, would be market-clearing price of wheat in a world where physical traders (i.e. real buyers and sellers) dominated?...MORE