Most often I agree with Paul Krugman, at least about the economic aspects, he having a real Record of being very good at playing Horseshoes in intellectual Economics, where Close counts. I am not so sure on this one, but not because of his Precepts. Paul’s basic contention is that Speculators are not responsible for the Oil price seen these days, a sweeping Statement with which I have difficulty. He implies that long-term Speculator pricing must have some element of hoarding of Product, for the high Pricing to be maintained. I find this highly debatable.
I choose to approach the Issue from the arena of Monetary policy. Speculators are in perpetual pursuit of high Profits. They are notorious for desertion of markets of low Profitability, or those with a delayed Turnover profile. One finds little Speculation in Bond markets, at least in terms of the Stock markets; this due to smaller Profit margins and longer Transfer periods involved. A glimpse at Commodity markets notes two special facts: the first being the rapidity of Exchange of Product, the second consisting of the volatility of Prices. Two elements protected Markets from Speculators: the first being that the various Markets operated according to different Rules and Operations (methodology), the second that Markets depended upon their own Income generation. Along came Monetary policy with its dedication to maintained liquidity, and suddenly, Money was slushing between Markets; gaining rapid transference as Markets proved to be periodic Speculator duds, and Speculators became more comfortable with the operations of different markets.
The culprit behind the new Speculation stands as Monetary policy with its commitment to Liquidity. The new Money flows drain excess funds to alternate Markets because of the lack of Profitability and rapid Turnover in the Exit markets. Monetarists spot the drying up of funds in these markets, and proscribe more liquidity measures. Funds continue to flee these Markets because of the low Profitability, and it excites even more liquidity measures. All of the later does not improve the Money levels in the Exit markets, or is it helpful in the Entrance Markets; which endures rapid Product price increases, and no leveling process as long as Money continues to flow into their market. The Cure for Speculation in the Commodity markets is a tight Money policy, but Fed officials cannot understand We face an almost exact opposite Situation from that which the Fed faced in the Great Depression. We need to shut off the Spigot to level Prices in the Markets, and to engender a reversal of Money flows back to their original markets. lgl