Speculators: Good or Evil?

Everybody -- politicians especially -- loves to rail about the evils of "speculators."   They must be the ones driving up the price of oil!  Back in the spring, as gas prices were accelerating toward their current highs, President Obama joined the usual chorus, blaming the price run-up on speculators and proposing new restrictions on oil trading as the fix.

From Business Week, April 19, 2012:

On Tuesday, President Obama announced he wants Congress to increase the amount of collateral that traders have to post to buy a futures contract. (It’s typically around 10 percent of the value of the total contract.) Obama also wants to give the CFTC an extra $52 million to pay closer attention to the oil market and dole out stiffer penalties to those who manipulate it: $10 million instead of the current $1 million. That assumes of course that the CFTC can find those manipulators.

The President isn't alone.  Eliot Spitzer was famous for cracking down on speculators.  And it's not just a liberal disease.  Bill O'Reilly of Fox News, for example, widely considered a conservative (although he would say an independent) regularly rails against speculators, particularly in the oil market.

It's all economic nonsense of course.  Here's a very smart letter that appeared in the Washington Post a few days ago.  The author is Don Boudreaux of Cafe Hayek.

Have you noticed the enormous increase in greedy speculation in the northeast over the past two days? It's quite something! In advance of hurricane Sandy, consumers are now artificially increasing the scarcity today of the likes of bottled water, canned goods, batteries, and medicines by stocking up on these goods.

And all of this self-interested speculation - done merely in anticipation of staple goods being much more scarce after Sandy strikes than they are today - is applauded and even encouraged by the news media and government leaders!

What gives? Many of the same people who today publicly encourage us to speculate ("Make sure your family has ample supplies of batteries!") are among the loudest critics of speculation at other times and in other markets.

But in fact the oil speculator who, say, buys oil today in anticipation of oil becoming more scarce tomorrow does just what a consumer does today in a supermarket in anticipation of a disruptive storm: both persons usefully transfer resources across time. They both stock up on resources that are today relatively abundant in order to preserve these resources for consumption at a time when they are relatively more scarce (and, hence, more precious). Both persons transfer resources from today - when the consumption of any one bottle of water or gallon of gasoline provides relatively less benefit - to tomorrow when the consumption of that same bottle of water or gallon of gasoline will provide relatively more benefit.

Anticipating the future and taking actions to allocate goods and services from times of relative abundance to times of relatively greater scarcity is an immensely useful activity. And we all perform such speculation whether or not we are popularly identified as "speculators."

Just to continue the application of the abstract concept to the more mundane, how do you feel about traders who "go short," that is, sell something they do not own?  Traders who "short" stocks and commodities regularly come in for attacks from politicians and prosecutors.  But every business "goes short" in something or other every day.  For example, consider the contractor you hire to build a new bathroom.  He promises to do the job for a fixed price, and only then goes out and buys the fixtures, hires the plumber, hires the tiler, etc.  Should it be illegal?

A Few Questions For Obama and Romney

I don't know who is going to win today's election (although I'm officially predicting Romney), so to hedge my bets I'm going to pose a few questions for each of the candidates.

For Obama:

Do you think that the Federal government has an infinite ability to borrow without causing damage to the country and the economy?

Does the President have any responsibility to contribute to operating the government in a financially responsible manner?

Are Federal entitlements as currently structured sustainable? If not, what is your plan to make them sustainable?  Are you going to do anything about this in your second term, or just have a huge blowout and leave the problem for the next guy?

Is the explosion of recipients of programs like food stamps and social security disability during your term OK?

Are you going to continue the war against energy?

And a few for Romney:

Are you going to stand up for free trade or are you going to keep bashing China?

When are you going to get specific about necessary spending cuts?

Are you going to work toward getting government spending in line with revenues, or do you think that deficits are a "stimulus" so the bigger the better no matter how wasteful the spending?

Manhattan Orthodoxy in Local Races

A visit to the polls this morning confirms what I already knew: no competition in the West Village for any political office at the state and local level.

For State Senate from the Village, Chelsea, and midtown - an open seat! - the Democrat Brad Hoylman was the only candidate on the ballot.  No Republican and no minor party candidate was running.  (And by the way, the minor parties like Conservative, Libertarian, Green and Working Families of course all had candidates for President.)

For State Assembly, Democrat Deborah Glick was the only candidate.

There were numerous candidates for state court judge, all Democrats running unopposed.  The Republicans had cross-endorsed one of the candidates, but otherwise no one appeared on the Republican line or on any of the minor party lines.

The Republicans did put up a candidate for U.S. Congress, Michael Chan, to run against the incumbent Jerrold Nadler.  I suppose I should be grateful for that.  Also, the Republicans had a candidate for U.S. Senate (Wendy Long), although I have never seen an ad for her, and I bet that I was the only person in the polling place (out of hundreds) who could have come up with her name before I got the ballot.

Intentional Devastation Sure Beats Nature's Devastation

The following post was written on November 1, 2012:

Breaking news:  Mayor Bloomberg has endorsed Barack Obama, and has written an article on Bloomberg View explaining his reasons.  Here’s the article.

So what’s the main reason?  Climate change!

Our climate is changing. And while the increase in extreme weather we have experienced in New York City and around the world may or may not be the result of it, the risk that it might be -- given this week’s devastation -- should compel all elected leaders to take immediate action.

That’s right.  There’s been “devastation”!  Therefore our leaders must take “immediate action.”  What kind of immediate action?  Action to “decrease our carbon consumption.”

Hmmm.  I think  I’m experiencing a good piece of the “devastation” right now, namely that the electricity is out.  That is causing a huge decrease in my carbon consumption.  Wait a minute, is that “devastation” or is that something that the government should impose on us intentionally?  Intentionally imposed devastation in order to avoid devastation?

Here’s a new Romney ad on the subject.

So because we might suffer natural devastation once every few (or maybe one hundred) years, let's inflict the exact same devastation intentionally and all the time.  If we can make electricity so expensive that you can't afford more than a little of it 365 days a year, then we can (maybe) avoid having the electricity knocked out for a few days every decade.  Yup, makes a lot of sense.

The High Tax Higher Spend Government Model

The following post was written on October 25, 2012:

If you are part of the official Manhattan groupthink, you read the New York Times, and particularly its tribune of matters economic, Paul Krugman, and so you know for a certainty that there is nothing wrong with the American economy that cannot be fixed by higher taxes and even more government spending.

Of course others have tried the high tax higher spend massive deficit approach, so from time to time we need to look at results from other locations to see how their policies are working out. Here are just a few recent examples:

Here’s a report from Walter Russell Meade on the state of California, Illinois and New York relative to the rest of the United States.  It’s more about Illinois than the other two.  My favorite part is that Illinois has issued close to $40 billion of pension bonds because they basically make lavish pension promises and then don’t fund them at all.  Even with the $40 billion of phony borrowed contributions, they have an $85 billion shortfall in pension funding.  Good luck with that!

Here’s an up-to-date report on the slow motion collapse of Greece:

Well, how about Japan.  Massive deficits and zero interest rates for over 20 years.  Accumulated debt now is over 200% of GDP.  Demographic collapse such that there is effectively no hope that anyone will be around to pay off those debts.  How’s it working out?  Stagnation!  So what’s the solution?  According to today’s [Oct 25, 2012] Wall Street Journal, Japan is planning a new “stimulus package.”

You can’t make these things up.  The Keynesian fallacy is so powerful that it seems to make it completely impossible to learn from experience.

The Hydrogen Economy

The following post was written on October 24, 2012:

The area of energy and the environment provides a constant stream of idiotic pronouncements that will be a recurring topic for this blog.

For a starter, consider the so-called “hydrogen economy.”  For the past 25 years we have been in the grip of the "global warming" scare, whereby environmental activists advocate that the burning of hydro-carbon-based fuels will lead to a rapid warming of the earth that will quickly imperil civilization.  But what are the alternatives to hydro-carbon based fuels (coal, oil, natural gas)?  Burning a hydro-carbon involves oxidizing both carbon and hydrogen, thus releasing not only water (H2O) into the air, but also carbon dioxide (CO2), which is claimed to be the main culprit in warming.  Why don’t we stop burning hydrocarbons and just burn hydrogen for energy?  According to advocates, that will completely solve the global warming problem!  When you burn a hydrocarbon like natural gas (CH4) or gasoline (mainly C8H18) you get both CO2 and H2O.  When you burn just hydrogen, you get just water.  Voila, the CO2 problem is gone!

Who can see the flaw in this?

Here’s an article from a British source (Telegraph) that gives a relatively balanced account.

The “balance” includes quotes from hucksters promoting government-funded hydrogen energy schemes.  This is an area where balance is totally the wrong approach and only ridicule is appropriate.

Here’s what’s wrong with hydrogen energy:  there is no free hydrogen gas available on earth.  There’s plenty of hydrogen, but not in the form of a free gas that can just be taken from the air.  (By contrast, nitrogen or oxygen can just be taken from the air.) 

So where can you get hydrogen?  Two places:  natural gas (CH4) and water (H2O).  You can separate the hydrogen from the carbon in natural gas by running steam through it in a process called reformation.  The carbon combines with oxygen and dissipates off as CO2, leaving the free hydrogen.  Easy!  This is in fact how most free hydrogen is obtained, to be used for purposes such as fertilizer (main ingredient - NH3).

Wait a minute!  The whole idea was to avoid getting CO2 into the atmosphere.  So now, in order to avoid burning natural gas for energy, you have used up some energy separating off the hydrogen, dissipated the CO2 into the air without getting any energy in return, and now you have hydrogen to burn, which is very tricky to transport and store, even trickier to use, and generates less energy on burning than does the burning of the original natural gas.  Congratulations!  No decrease in atmospheric CO2, a lot less energy output, and a bunch of hydrogen canisters everywhere that can blow up at the slightest spark.

Well, how about getting the hydrogen from water?  Easy!  Just use electrolysis.  Run electricity through the water, and it just disassociates into hydrogen and oxygen.  Nothing to it.  Oh, wait.  The amount of energy that you use up separating the hydrogen from the oxygen is less than the amount that you get back when you burn the hydrogen back to make water again.  It has to be that way.  Otherwise you would have a perpetual motion machine.  In other words, there is no possible way that hydrogen generated from water by electrolysis can be a better way to get energy than just using the electricity (generated from another source, usually burning hydrocarbons) that was the input to the electrolysis.  It’s the second law of thermodynamics.

If somebody has a third way of getting large amounts of hydrogen, I’d love to know about it.  Send a spacecraft up to mine the sun?

Well, if use of hydrogen fuel is such an obvious non-starter, surely no one of any intelligence would fall for it.  For example, how about our president?  Sorry, he has fallen for it.

To his credit, he and his Energy Secretary started out being against hydrogen as fuel, but came to the hydrogen party only this year as it became more and more obvious that the electric car thing was dying.   I’d like to be able to say something good about them for their earlier stance, but I just can’t, given that it is so obvious that hydrogen is a non-starter as a major energy source (at least until they figure out nuclear fusion); and also given the president's many other energy idiocies, about which I will have much more to say later.

GW Bush?  Even worse.  He touted the “hydrogen economy” to anyone who would listen.  Here’s the GW Bush White House energy agenda, including the “Hydrogen Fuel Initiative” with $1.72 billion of federal funding.

Romney?  The verdict is still out.  Can he resist this ridiculous groupthink?