Monday, August 01, 2011

The speculators!

"Speculation" and "speculators" are convenient scapegoats and villains for anyone ignorant of market economics.  Unfortunately, that's a large group. 

Adding to the confusion, teachers of introductory economics (when they pay attention to it) usually single out speculation instead of including it in the standard discussion of supply and demand.  All supplies and all demands are in light of market participants' understanding of the future.  This means that there are large numbers of current prices and futures prices that are inextricably linked.

I liked this piece in today's WSJ.  "Traders Eye Oil-Tanker Play ... Spread Between Futures Contracts Makes Stashing Crude Offshore Attractive"

It's a nice story for classroom use because it highlights the (natural) complexity of speculation.  Leave oil in the ground or take it out?  Then what?  The choices are huge.  Keep it in the tanker or not?  For how long?  Where?

It's all speculation and it's a natural and normal part of business.  In fact, being constantly challenged on how we deal with an uncertain future is a normal part of everything.