It's a common complaint from the left side of the political aisle today. That increased speculation in markets just pushes up prices in those markets. This idea has become especially prominent when talking about food prices and agricultural commodities. More people are investing more money in grains and meats and food oils, prices have indeed been rising. Therefore, in that oh so cute manner of the ill informed, the conclusion is leapt to that increased speculation brings about higher prices.
You and I might think that this is the sort of nonsense that is bandied around in the High School Trotsky Appreciation Club, but it has formed the basis of reports from NGOs such as the World Development Movement and Oxfam. It also seems to inform the pleadings of other such groups, Action Aid, CAFOD, coming to mind. Where any of those groups differ from teenage Trots of course.
However, there's an important question that needs to be asked about this idea. Quite apart from the manner in which all economist tell them it's nonsense. Increased speculation, they say, is leading to higher prices. We then get this observation from one of the more well informed academics dealing with futures and commodities, Craig Pirrong:
The anti-speculation frenzy that reached a peak in 2008, but has never gone away, is predicated on the belief that index investing-”massive passives” in the words of CFTC Commissioner Bart Chilton-exert a disproportionate influence on prices. So, this outflow of indexing money should have led to a decline in commodity prices right? But they have been up over 2012: one broad index, the UBS Bloomberg CMCI is up from 1520 at the end of 2011 to 1628 today, about a 7 percent increase.
But the anti-speculation folks have their story, and they’re sticking with it. Sayeth Dennis Kelleher of “Better Markets”, “There’s excessive speculation in commodity markets which is driving up prices.” QED.
Evidence? We don’t need no steekin’ evidence.
Quite. One of the ways of telling whether something is a fact or merely an expressed prejudice is to see what happens when the real world contradicts it. Those who thought they were expressing a fact will now admit they were in error. Those expressing a prejudice will ignore the real world rather than change their prejudice.
The amount of money being used to speculate in commodity markets is falling. Commodity prices are not falling: the volume of speculation therefore does not drive prices. QED.
