Terms like ’cause’ and ‘effect’ simply do not mean the same thing in self-organizing systems; often, those terms are functionally meaningless. That is hard to get one’s head around, I know. I’ll say it again: Systemic interactions are seldom cause and effect because different portions of a common system are not discrete from each other. Keynes and the Austrians are informed 20th century perspectives on 19th century capital flows, neither of which even in their day well-described mutual modulation in systemic processes. It is time, time and past really, to _junk_ the economics we have learned and to make an economics that uses definitions and relationships consonant with the processes represented. Think about it.

To S. at 1:54: I do not see the consensus you speak of re: the financial system, either in the US or amongst major global participants. Notwithstanding our difference there, I agree with the core point you raise in this comment, that major unrealized losses are having a paralytic effect upon policy initiatives through the last year, especially in the US, but elsewhere as well. Someone is going to take that the hit: in fact, everyone is going to take _a_ hit, and deeply wishes to minimize it, necessarily at the expense of some other financial system participant. When I call our present financial public authorities gutless it exactly because they have so far refused to designate domestic ‘hittees’ in the vain hope that the economy will come right, and they won’t have to do anything so unpopular. That is an entirely understandable decision even while it is most probably a mistaken one which will increase ultimate losses.

I am also in agreement with you, S., that US monetary policy for a generation has been a major net negative for the global financial system as a whole. But, and not that it gives me the least pleasure to in any way defend US financial public authorities who have shamelessly exploited our structural advantages over this time, we couldn’t have done it without the willing and indeed eager cooperation of ALL THE OTHER MAJOR PLAYERS since the time of the Plaza Agreements. They all agreed to back our false front greenbacks at well above what our GDP suggested its valuation should be because this allowed them to continue to optimize their pre-existing macroeconomic strategies and retain their niches rather than go through a major redo. —And we see the result now.

Frankly, the US should have had a prolonged recession/shallow depression in the mid to late 90s; I say that from a long-term modeling perspective. We didn’t. And not because of a ‘productivity miracle’ or an ‘information revolution’ or a fictitious ‘long boom.’ The rest of the world lent us the money to spin spurious ‘growth.’ When that wasn’t enough, they all edged down toward negative real rates. When _that_ wasn’t enough after 01 when we should have cycled through real losses, we went to negative real rates ourselves. But we got into this mess with a sphere full of co-dependents. . . . And now, we will all have to get out of it together. Failing that, we get a global crash, after which the most productive sovereign economies crawl back out of it first and write the terms on the New Real Deal. But that won’t be the US, and for policy makers here, _that is the problem_. So, no one in power in the US is eager to take the loss, in capital and influence, that is in the pipeline. And for sure, none of those non-leaders is going to step befoe the public and announce the Diminution of Empire (it won’t be over for forty years, give or take).

Is there any argument futures markets set prices for many physical commodities?

Let’s be clear, however. Speculators who use futures markets to hedge their physical interest in a given commodity serve both a useful and desirable purpose.

On the other hand, speculators chasing investment yield through increasing allocations in Index Funds are serving no useful purpose. Indeed, as we see with our own eyes, the result is socially destructive. Therefore, those firms promoting such investments (Goldman Sachs and Morgan Stanley to name two) should, first, be held in contempt and, second, be regulated.

Now, could the destabilizing impact Index Funds are having on commodities futures markets occur without monetary inflation?

Yes, of course.

However, without the help of relaxed CFTC regulation, the answer would be no, and this, with or without monetary inflation.

It is on this count, then, the FSA calling U.S. movement to gain regulatory redress over the City’s oil market “American imperialism” a knee-slapping laugh to this American. Talk about the pot calling the kettle black!

True, the U.S. Congress might seem to resemble more the Iraqi Parliament than the House Henry Clay built. However, the streets are nothing like those in Baghdad. How could they? They weren’t built by a deranged Tory aristocracy, but rather by benevolent republicans guided by wisdom codified in a written constitution…

Yves Smith + Adam Smith = Adam & Eve?

The Federal Reserve is the mechanism of transmittal of extreme behavior (or at least the results of extreme behavior) from Wall Street to Main Street.

If an investment bank blew up and took out 10 other investment banks and 1000 hedge funds, I think Main Street would be better off. The Fed thinks differently though.

Why oh why has everyone forgotten that inflation is a monetary phenomenon. Keynsian price inflation isn’t even well defined and it’s so painful to read people talking about oil causing inflation.

An equally valid counterpoint might be:

” the absence of a substantial decrease in physical commodity inventories has been mentioned as evidence of speculative activity”

Contemporary economists(read:Ivy league) seem almost incapable of critical thinking. Was it a shortage of housing that led to the housing bubble ? No.

Was it speculation fed by liquidity, yes.