Econ 101

Dan brought home an interesting "article." Well, it's not so much an article as it is a "Testimony of Michael W. Masters, Managing Member/Portfolio Manager, Masters Capital Management, LLC before the Committee on Homeland Security and Governmental Affairs, United States Senate, May 20, 2008" Wow, that's a mouthful!

The basic thesis, I would say, is that a group of institutional investors are driving up the costs of oil, food, etc, in the commodities futures markets. Masters shows the history and specifically the last five years of these "Index Speculators" and the result of their hoarding. Prices have drastically increased in markets like coffee, corn, wheat, live cattle, lean pork, etc. because of the "Index Speculators" driving up the costs with their insensitivity to price.

Here's just a portion from his testimony - I'm sure you can google him for the .pdf if you want the whole thing:

Let's turn our attention to food prices, which have skyrocketed in the last six months. When asked to explain this dramatic increase, economists' replies typically focus on the diversion of a significant portion of the U.S. corn crop to ethanol production. (see http://www.economist.com/opinion/displaystory.cfm?story_id=10252015 "The End of Cheap Food") What they overlook is the fact that Institutional Investors have purchased over 2 billion bushels of corn futures in the last five years. Right now, Index Speculators have stockpiled enough corn futures to potentially fuel the entire United States ethanol industry at full capacity for a year. (see "Ethanol Reshapes the Corn Market" http://www.ers.usda.gov/AmberWaves/April06/Features/Ethanol.htm ) That's equivalent to producing 5.3 billion gallons of ethanol, which would make America the world's largest ethanol producer. (see "Ethanol Production Could Be Eco-Disaster, Brazil's Critics Say" http://news.nationalgeographic.com/news/2007/02/070208-ethanol.html)

He is asking Congress to take out the loopholes created back in 1936 and regulate the commodities futures markets like they regulate pension funds.

Reading this led me to a unique little book on economics - it's like Econ 101 in less than 100 pages by Richard J. Maybury, entitled, "Whatever Happened to Penny Candy?" It's a great little booklet that summarizes economics and has a variety of resources to continue exploring.

As the dollar continues to weaken, I'm reminded of a quote by Nikolai Lenin, yes, the founder of the Soviet Union: "The best way to destroy the capitalist system is to debase the currency."