Speculators at the Pumps

Sarkozy is right that leverage is not necessarily good just because the free market allows it, and that speculators occasionally act in a destabilizing way. But speculators more often act as detectors of changes in economic fundamentals, or provide the signals that smooth transitory fluctuations.

Furthermore, ample worldwide liquidity and the rise of other commodity prices induced market speculators to buy into oil futures.

It is also correct that if OPEC had excess capacity, it would have already used it to flush out speculators to bring oil prices down. OPEC can regain control in one of two ways use its claimed excess capacity to flush out speculators, or use its financial surpluses to overtake them.

Thus, record high speculative prices have likely caused bunker traders to release inventory, but those releases may have been purchased by speculators who are now active lessees of commercial storage capacity. The implication is that speculators can drive up prices and increase their inventory holdings even as total commercial inventories remain little changed.

Newly discovered deposits of diamonds in Gbarpolu and Nimba counties recently led to the movement of a significant number of speculators to these areas.

Not falling for the trick, speculators repeatedly called his bluff. Draghi, with his famous pledge to do whatever it takes to ensure the euro s survival, succeeded where Paulson did not.

How can President Sarkozy, who has repeatedly attacked financial speculators, question the judgment of the very man who, by knowing how to keep his mouth shut in a crisis, thwarted them?

It was the speculators whose blood flowed in the streets when they attacked Hong Kong s dollar peg in 1998. But overall, betting against big government financial institutions proved to be a richly rewarding business.

Hong Kong s government, led by the HKMA, launched an unprecedented intervention, buying up local shares to defeat the speculators, but failed to stop the stampede by global investors, including conservative pension and mutual funds.

In the US, this has complicated the Federal Reserve s task. The Fed has been trying to slow demand growth and cool the housing price bubble to avoid inflation, but carry trade speculators have been easing credit.

If a country is bankrupt, it must let its creditors know that it cannot repay its debts. And speculators must take responsibility for their decisions, and stop clamoring for taxpayer money whenever their investments turn bad.

The notion of unlimited quantities was important speculators would force officials to exhaust limited quantities, with the purchasing authority (the Bundesbank) eventually bearing the loss. Monetary support would lead to fiscal transfers, making limited interventions a non starter.

The notion of unlimited quantities was important speculators would force officials to exhaust limited quantities, with the purchasing authority (the Bundesbank) eventually bearing the loss. Monetary support would lead to fiscal transfers, making limited interventions a non starter.

The French have not yet been able to obtain agreement from the other G 20 members on measures aimed at regulating commodity speculators, such as limits on the size of their investment positions. I hope it stays that way.

After all, America s still large current account deficit guarantees that the dollar will continue to fall. Even so, the macroeconomic logic that large current account deficits signal that currencies are overvalued continues to escape the world s international financial investors and speculators.

During the 1997 1998 Asian financial crisis, East Asia s economies paid heavily for excessive accumulation of dollar denominated debts. Because governments failed to defend their currencies, they lost hundreds of billions of dollars in foreign exchange reserves to international speculators.

In neither scenario does it make sense to hold huge amounts of dollar denominated assets today. Therefore, foreign speculators should, any day now, dump their dollar denominated assets onto the market, and so bring about the dollar decline that they so fear.

The recent Greek crisis has further galvanized the anti CDS camp. After all, isn t it the fault of the CDS market s avaricious speculators that Greece was on the verge of default and that Greek public employees have had to endure deep wage cuts?

Of course, if higher prices are due to fundamentals, oil markets are working as they should. But if they are due to speculation, then policymakers speculators must act to rein in behavior that has imposed huge and needless costs on the global economy.

The new Consumer Financial Protection Board is also a deterrent, as banks consider it safer to lend to the government, large corporations, and giant real estate speculators. The banks can report record profits without much risk, rebuild capital, and pay dividends and bonuses.

Thai import export firms can bet on a run on the baht by accelerating their dollar receipts and delaying their dollar payouts. Everyone can bet on a run on the Argentine peso a favorite sport of international financial speculators for a century and a half.

Obviously, this is the scenario that everyone with the possible exception of some speculators wants to avoid. And, after the recent EU summit agreed on an ultima ratio rescue plan for eurozone countries facing the danger of default, chances are high that it will not materialize.

Speculators could have front run the bank in the markets, selling short, driving equity prices down, and forcing the French financial institution to sell into a bottomless pit. Is a forced bankruptcy in extremely fragile global financial markets what the French government wanted for Société Générale?

However, there is considerable evidence that strongly indicates rampant speculation in today s oil markets. One key sign is the documented change in the character of oil trading, with speculators (i.e., financial institutions and hedge funds) now accounting for 70 of trades, up from 37 seven years ago.

But foreign currency speculators and international investors are not looking forward to either of these scenarios. They continue to hold very large positions in dollar denominated assets, which they would not do if they thought the US faced a choice between a cheap dollar and a deep depression.

A third argument is that if speculation were to blame for price increases, there should have been an increase in oil inventories, because speculators do not consume oil but instead store it for later sale. Since there has been no rise in inventories, there has been no speculation.

The Fed is purposefully and insidiously distorting the incentive system specifically, signals provided by the price of money resulting in mal investment (and, when public debt is monetized, inflation). This can continue for a time, rewarding unproductive investments and aspiring oligarch speculators who presume that the Fed has eliminated risk.

Mrs. Watanabe is the generic name for Japan s housewife speculators, who have wielded significant influence on foreign exchange and other markets through their trading. After graduating from university, Mrs. Watanabe quit her job when she married Mr. Watanabe (who worked in the same office), became a housewife, and raised one daughter.

US interest rates did not really rise in 2014, so most of these mechanisms are not yet directly at work. But speculators are thinking ahead and shifting out of commodities today in anticipation of future higher interest rates in 2015 the result has been to bring next year s price decrease forward to today.

Yes, China continues to accumulate a vast fund of foreign exchange reserves. But this is as much the result of speculators hot money plays as it is a conscious and perfectly reasonable effort by Chinese policymakers to remain focused on financial stability and manage currency appreciation in a gradual, disciplined, and orderly fashion.

Occasionally, the object of speculation has been one of those fundamental technologies canals, railroads, electrification, radio, automobiles, microelectronics, computing, the Internet for which financial speculators have mobilized capital on a scale far beyond what rational investors would provide. From the wreckage that has inevitably followed, a succession of new economies has emerged.

Nearly 90 of the 12 month surge in the CSI 300 was concentrated in the seven months following the start of cross border investment flows via the so called Shanghai Hong Kong Connect in November 2014. As a result, speculators had little time to let the capital gains sink in and have a lasting impact on lifestyle expectations.

The continuation of the current crisis is likely to produce more foreign exchange crises, as governments creditworthiness and the position of their banks go hand in hand. In 1992, during the crisis that rocked the European Monetary System, France s finance minister, Michel Sapin, spoke in parliament about how the French Revolution had used the guillotine on speculators.

Some eurozone countries borrowed excessively and have been punished by the markets, perhaps deservedly so, while others, in the resulting climate of anxiety, have become targets for speculators. On July 21, eurozone leaders agreed to make more extensive use of the new European Financial Stability Facility (EFSF) by permitting it to purchase endangered eurozone countries debt in secondary markets.

In early 2013, the government was forced to announce a 32 devaluation, and stopped issuing government debt in dollars. The issuance of dollar bonds was a major source of abuse, with speculators buying dollar debt at the official exchange rate, selling it for greenbacks, and then exchanging them for bolivars at a much higher rate on the black market.

The IMF could be a powerful financial stabilizer if it managed a significant part of the new surplus countries reserve assets, for it would be well placed to take bets against speculators. This would ultimately benefit the reserve assets owners, who, by virtue of accumulating large surpluses, have a similar interest in world economic and financial stability.

One approach might be simply to let the renminbi float without official intervention or controls on capital inflows. Again, this would inevitably trigger hot money inflows, with speculators taking advantage of the spread between Chinese interest rates and the near zero, short term rates in developed economies, thereby driving up the renminbi further (and creating yet more opportunities for speculation).

The existence of large financial market actors that do not care about maximizing their profits magnifies the riskiness of the bets. If, say, the Bank of China and the Federal Reserve decided to teach speculators a lesson by pushing the dollar s value relative to the yuan up by 20 for a month, they could do so, bankrupting many financial institutions with short positions.

Had that happened, there would have been an unacceptable risk that the news would leak to speculators before Société Générale had a chance to liquidate the extraordinary large stock positions that Jérôme Kerviel had amassed, presumably without the bank s knowledge. The loss for Société Générale could have been far higher than the 5 billion it is reported to have incurred.

Distrust of highly paid people who work behind computer screens doing something that doesn t look like productive work is everywhere. Paper shufflers are doing better than producers speculators are doing better than managers traders are doing better than entrepreneurs arbitrageurs are doing better than accumulators the clever are doing better than the solid and behind all of it, the financial market is more powerful than the state.

Japan s ultra low interest rate policy was initiated in the 1990 s to put a floor under the economy following the bursting of its asset price bubble. However, over time these ultra low interest rates have promoted a highly speculative financial carry trade speculators borrow yen at low interest rates and then buy dollars and other currencies that are invested in higher yield assets elsewhere.

Today, Erdoğan s government looks much more like the governments against which young Arabs rose, targeting journalists and accusing a high interest rate lobby of speculators of seeking to harm the Turkish economy. He has also taken a page from Syrian President Bashar al Assad s book, not only demonizing the demonstrators, but also going after the medical personnel who care for them and the hoteliers who shelter them.

First, thanks to an effective albeit porous capital control regime in China, short term hot money (capital coming into China aimed at arbitrage, rent seeking, and speculation) could not enter (and then leave) freely and swiftly. Second, short term capital flows usually would strengthen rather than weaken upward pressure on the RMB s exchange rate, because speculators, persuaded by China s gradual approach to revaluation, bet on appreciation.

Under capitalism, one is immoral if one reneges on a contract or breaks the law, but not if one speculates. Planned economies were never able to flourish because uncertainty about the future is just too high, something that is best left to the speculators, with the potential of reward if they are right and the disciplining whip of the market if they are wrong.