May 30 2008
CFTC to Announce Rule Changes to Address Commodity Prices
This is truly worrisome. The Commodity Futures Trading Commission is set to release new rules on Monday:
“The (CFTC) has been wrestling for more than a year over farm industry demands that it examine the role that new financial investors are having in the futures markets, especially those who are investing through commodity index funds.
As commodity prices have risen over the last several years, these funds have become an increasingly large player in the commodity futures markets, rising from a stake of roughly $13 billion in 2003 to an estimated $250 billion this year.
Unlike traditional commodity investors or balanced hedge funds, these index funds do not both buy and sell commodity futures — they only buy, reflecting investors’ desire for a stake in a rising market.
That lopsided trading pattern has generated complaints — most recently at a hearing last week before the Senate Committee on Homeland Security and Governmental Affairs — that index investors are artificially driving up commodity prices at the expense of consumers.
One Senate witness even proposed that federally regulated pension funds, a major source of index fund investments, should be forbidden from investing in commodities because of their impact on consumer prices.”
That’s from the New York Times today. While it is tough to say what these rules will do, we certainly hope those wanting to limit the flow of dollars to where they want to go to get there way. Granted, it is unfortunate that so many dollars flooded the world economy over the last few decades, and now they wish to find a home outside of financial assets that have been exposed as economically not viable absent ever increasing credit and money supply vs. genuine economic growth. So, naturally, the laws of scarcity and supply and demand are at work, as are the laws of venting bubbles. Supply of dollars super-high, and investors have lost their appetite for bubble assets, so they want something more tangible and less likely to be printed where they can more reliably store their wealth. Were they not to, down the road they’d simply lose their purchasing power.
You see, investors have been wakened from their slumber at long last, and now they realize that inflation was running rampant. See our prior two posts for the details.
That aside, should the fools in Congress pressure the commodities exchange to prevent the free flow of capital into commodities, well ladies and gentlemen, there goes a big vestige of what’s left of the U.S. free market. Those, dear readers, are called capital controls.
If that happens, expect the largest investors — those with the clout to do so — to hope on other exchanges to buy those assets. Expect foreign oil producers to start dealing in other currencies. Expect Congress to have to react to the massive problems that will create — the ones such controls half of them are pushing for, hence the commodities Exchanges urgency for Monday’s proposal. And, expect those new proposals to only further worsen the condition.
This, folks, is why you don’t get onto the inflationary money and credit policy for ginning up the economy artificially. Eventually it breaks and catches up with you. But like a smoker of thirty years who is diagnosed with cancer asking his doctor, “what do I do?”, we all know the answer to the question was well known thirty years prior: Don’t smoke. You’ll get lung cancer.
And, so now, the die is caste. The options are all unattractive and painful, but some are clearly in the direction of clearing the economy if this mess, while others will only worsen and compound the crisis. One simply bites the bullet and gets it over with, the other — the solution currently demanded by Wall Street, the Lunatics on the Potomac, and their economically illiterate constituencies — the same one being pushed by policy makers at the FEd – will simply drag out the process, much like a heroine addict who believes feeding his habit is better than the abyss of the withdrawal.
Hold on to your hats and your commodities. The eye of the storm is passing, and the back side of this will turn very ugly. The question of Depression and the end of the U.S. dollar, quite frankly, rests in the hands of the politicians and the Fed — both of whom seem hell bent on avoiding the day of reckoning at any cost. But that day will not be denied, and each day its pushed off with more of the very policies that created the malignancy, the worse the inevitable becomes.
