Reader Sundog suggested I gather reader comments on ECONNED and update them weekly, particularly since I am answering questions. In the future, I’ll do this on slower news days (probably Saturday AM into Sunday), but figured I should start now.
Also, radio/TV bookings are just starting, will also keep you updated. I was just on WLW, the Bill Chapman show, out of Cincinnati (3/7, 11:30 PM EST); will be on WBAI with Doug Henwood at 3:00 PM EST on 3/8. Some TV bookings circled for this week, not yet confirmed.
We also got a very nice review from Joe Costello at Archein, which he starts with the closing paragraph of the book:
The result has been a massive transfer of wealth, with its centerpiece the greatest theft from the public purse in history. This campaign has been far too consistent and calculated to brand it with the traditional label, “spin”. This manipulation of public perception can only be called propaganda. Only when we, the public, are able to call the underlying realities by their proper names—extortion, capture, looting, propaganda—can we begin to root them out.
The review continues here.
Here is one conversation in comments:
March 7, 2010 at 3:32 pm (Edit)
2 questions about “Econned”. At the beginning of chapter 2, Krugman is savaged for saying in 2008 that skyrocketing oil prices were not driven by speculation.
1) I don’t understand what argument Krugman was making about futures price and spot price. What should be the relation between futures and spot prices in presence and absence of significant speculation?
2) The other argument by Krugman is illustrated by Figure 2.1. On the horizontal axis is Quantity and on the vertical one is Price. You have two lines representing Supply and Demand. The Supply line goes up, which seems to mean that as producers make more of the same stuff they’re asking higher prices for it. Does that make sense? Are we talking price per item?
Yves Smith says:
March 7, 2010 at 6:45 pm (Edit)
One of the arguments made (Mike Masters in particular was big on this) was that investors using futures contracts as an inflation hedge was distorting prices. The data did clearly show a big increase in “non commercial” purchases of commodities futures of all sorts, generally via index funds (personally, I don’t think this was likely the main distortion mechanism; the oil market has a proud history of traders, as opposed to passive investors, pushing prices around).
Krugman basically said those futures purchases were irrelevant, since futures all converge to the spot price.
Re his chart, that depicts a general argument often made. He’s basically saying, “OK, let’s say, despite my belief otherwise, that somehow these speculators pushed prices higher than the level that would be due to fundamental forces.” In that argument, the “higher price” is the horizontal line, the price you’d get from fundamental forces is where the supply and demand lines intersect. The shaded triangle is excess inventories. If you have a higher price than dictated by the “fundamental” price, you’d expect to see inventory accumulation. He said there was no evidence of inventory accumulation, ergo the price must be right (as in the result of fundamental forces).
March 7, 2010 at 9:48 pm (Edit)
Thanks for the reply. So, Krugman’s argument was that futures and spot prices were converging.
But, can it happen that all the available oil is bought in the form of futures (by real users and speculators) and there aint any left to be bought on the spot?
March 7, 2010 at 10:08 pm (Edit)
The problem lies with the definition of what is an inventory for oil. If one adopts a narrow definition (tanks in cushing, floating storage in supertankers), inventories have not raised by much and the argument by Krugman is valid. However, spare capacity in oil wells that can be tapped quickly represent a “shadow” storage capacity that can be mobilised through the intertemporal oil market (futures and OTC instruments). In normal times, this shadow storagehas no value, but when investors want to get long oil without the capacity to store it, holders of storage capacity(shadow or narrow) can ride the contango by selling the short end futures (no risk to them as they have the capacity to deliver), but knowing very well that these futures are in fact going to be rolled thus extracting a big benefit every time there is a roll, by putting themselves on the other side of the roll trade.
If one counted these “shadow” inventories that were mobilized, Krugman assertion may not be that valid…
The final problem is to find out if this mecanism is “evil” speculation, or “legitimate” market behaviour driven by an adjustement of expectations of future oil availability and demand on one side, and the real value of the dollar on the other.
Yves Smith says:
March 7, 2010 at 10:17 pm (Edit)
You need to be a professional (have access to storage) to use futures as a way to “buy” oil. In fact, only people who can take delivery are allowed to enter into contracts where they might have to take delivery.
Krugman’s point on spot v. futures would be correct if people bought oil based on spot prices (or in relationship to spot prices) which is the way it works in most commodity markets. But precisely because oil had had a history of price manipulation, prices were set for many buyers and sellers not via spot prices, but via the BWAVE, which is formula which averages futures prices.
I’m intrigued by the 3-body problem expounded in Chapter 2 of Econned as an example of non-ergodicity in real-life. Samuelson’s ergodic assumption states that there must exist a “unique, long-run equilibrium independent of initial conditions”. On the other hand Poincare showed that solutions to the 3-body problem were so sensitive to initial conditions that infinitesimal variations in them lead to totally different outcomes.
1) It seems to me that Poincare’s findings only partially negate ergodicity. Let’s say for argument’s sake that there are 2 solutions to the 3-body problem. In the 1st we have a system like sun+earth+mars, body 2 and 3 orbiting body 1. In the second we have sun+earth+moon, body 3 orbiting body 2 that orbits body 1. Those two solutions are different but they’re still stable. What’s most important for economists? The existence of an equilibrium or the uniqueness of that equilibrium? Maybe they can work with ergodicity-lite: “there exist different long-run equilibrium states that depend on initial conditions”.
2) Extreme sensitivity to initial conditions reminds me of climate modeling. We’ve all heard of the “butterfly effect”. You launch a simulation you obtain sunny sky. You change an input variable just a wee tiny bit (like the flap of a butterfly’s wing) you obtain a hurricane. I’m not a climate scientist but my understanding is that they overcome this problem by performing a lot of simulations with a lot of different input parameters. Apparently the average of all the different results is to be trusted. This might be similar to the Monte-Carlo method where you randomly sample the space of all possible configurations. If climate scientists do it and physicists do it, why can’t economists do it too?
Yves Smith says:
March 8, 2010 at 12:23 am (Edit)
I had an elite mathematician (Harvard PhD in theoretical math, which if you know math programs, makes him one of the very top mathematicians in the US) editing the book. This isn’t a matter of two solutions to the three body problem. The number of solutions, for practical purposes, are so large as to be incomputable (or more accurately, if I recall the later Karl Sundman solution correctly, this is the problem with not being a Serious Mathematician, is that while it was in theory solvable, the proof demonstrated that any solution would require so many terms as to make it unsolvable for practical purposes).
From March 4:
March 4, 2010 at 7:34 am (Edit)
I’m having a Dean Baker moment.
Only thing I see missing from ECONned’s index: Dean Baker!(*)
He got the housing bubble right, for the right reasons, earlier than almost anyone.
Not to mention calling the dot com bubble, which saved me quite a bit of money.
(*) Well, not entirely. No reference to Henry George or e.g. Michael Hudson either. If we taxed the cr*p out of land, credit markets would be much much smaller, and bubbles would be far fewer. Otherwise book seems really good.
Yves Smith says:
March 4, 2010 at 7:45 am (Edit)
Just so you know, Palgrave fought me on book length (look at teeny type of endnotes and the treatment of the dedication…). Given that that the book covers over 60 years of territory, that forced some choices.
And from March 3:
March 4, 2010 at 1:40 am (Edit)
Yves, I have to commend you on Heart of Darkness. It’s an excellent piece. ‘trading sardines’, very droll
I was dismayed after reading chapter nine, to read Michael Greenberger’s presentation at the Roosevelt Institute which leaves little hope that his sensible (and revoltionary) suggestion will make it into the legislation as long as Geithner’s in charge.
Perhaps you can deliver an autogrphed pamplet containing Chapter 9 to every senator/congressman who has a hand in crafting the bill, with copies for Timmy and Summers for good measure. II’ll contrast nicely with the ISDA papers they’re more familiar with.