If one wants, a forwards commodities  market that "requires" physical
delivery (no paper offsets) can help address the desires towards price
stability. However it's worthwhile considering that from a producers
standpoint, the desire for price stability is really a desire to
operate with lower capital requirement. In other words arguably if one
weren't under-capitalized , just ride out the price swings. (7 rich
years, 7 lean years comes to mind )

You're quite right. I was thinking far more of Bloom's comments about
food production. Yes oil is a commodity, and yes, it's real price on
physical delivery fluctuates, but I don't think it's seasonal in the way
that food always is. By that I mean production is reasonably constant
and controllable, and therefore predictable. Yes, oil fields come and go
but they don't do so in the manner of dramatic winter storms or
droughts.

Those storms obviously do alter energy demand, I appreciate that too,
but they don't do so in the way that agriculture is affected: a good
growing season, the thing all farmers aspire to, counter-intuitively
drops prices (if everyone succeeds). You can just leave oil at the
bottom of the well, but produce is harder to deal with.

Thus a fluctuating oil price doesn't properly reflect real supply and
demand, as you point out, but the produce prices do, to the detriment of
farming. If people want to take a profit by speculating within the
highly risky price delta, I don't have a problem with that, AS LONG AS
the base for pricing remains in the real world of supply and demand, as
you suggest.

The huge trouble with derivatives is that they seek to reduce risk. This
can't be done. Risk treated in this way can only be disguised, not
removed.

An analogy is the humble motor car: it's a fool's errand to try to make
a car more reliable by increasing its complexity. Unless the components
you add are themselves staggeringly more reliable than the basic
machine, AND they operate to improve the basic machine's reliability
significantly (orders of magnitude are required), the net result of
increasing complexity is ALWAYS to reduce reliability.

Reliability is the inverse of risk of failure, 'failure' in the
commodities markets being bad outcomes to purchasing decisions.

. . .

So yes, I'm convinced you're right: a legal insistence on physical
settlement (inherent in produce) would probably go a long way towards
taking the speculative heat out of the commodities markets. Is it one of
those 'they'll never agree globally' things, or is it practical for
producer/consumer nations such as the US and the UK to lead the way? I'm
not sure.

I think the big problem is correctly apportioning moral hazard. The
politicians have ensured that those who should be taking the pain right
now (bankers, insurers, etc.) simply aren't. In that climate, it's hard
to see anything sensible being implemented.

It's also worth considering that with a prolonged period of apparent
low volatility (which might be resulting from efforts at maintaining
price stability) , people can/will get overconfident/ complacent. If
the system is fundamentally flawed in the first place, at some point it
will unwind, and a result can be the BIG UNWIND.  Isn't this
essentially Nassim Taleb's argument, or am I thinking of someone else?

I think so - it's several years since I listened to one of his YouTube
interviews, and with my fried brain that might as well be decades.

Personally, I've a fairly strong preference to taking medicine in small
doses, rather than the BIG UNWIND.

The difficulty is when the preexisting problems are doing so much damage
that the fix, though painful, shouldn't be delayed.

I think that's the issue we face now, for example with housing. We DON'T
have excess demand, except it's created artificially by three things:
mass immigration, the divorce rate in the 20-50 age group (who have kids
and thus suddenly need TWO 2+ bedroom properties), and finally, stupidly
low interest rates allowing a huge sub-prime gin-trap to be built for
the financially stupid.

Those are the underlying reasons for the bubble, but most of its
enclosed volume is the huge industries that have grown up to service the
false demand: mortgage funding, insurance, new-build housing, etc.

In the boom years this gave a false boost to UK growth figures (like
forcing rhubarb then applying a tape measure), and it has to be dealt
with somehow. I was at a dinner party last Monday, where a youngster's
job in insurance was spoken of as a great career in a fast-growing
"industry." How did we get THERE?

Our children won't be paying a mortgage to buy a house, they'll
effectively be paying rent to the financial services sector for their
lifetimes.

If your major asset is taken piecemeal from your estate, to pay for the
later years of your life (and through death duties), have you ever
actually owned it? Or did you just act as caretaker for the state and
the banking/insurance industries?

With the state sector at 52-55% of GDP again, capital attrition (and
head-on raids) through taxation, stupid interest rates, and house
prices, the answer is obvious.

We haven't had a boom in private ownership. What we've actually had is a
smash+grab raid on land and property by the banking sector and its
henchmen, with a succession of complicit socialist governments holding
the swag bag open.

Worse still, although all non-urban land is vital to our country (un-
farmable land is just as important as prime agricultural), it's now
under-valued, thanks to absurdities such as the CAP and other
interventions that diminish the economic importance of production to
farmers. Of course they're 'custodians of the countryside' but once you
distort their incomes, via idiotic schemes such as set-aside, you start
to make them believe the land is more 'productive' as housing and
shopping malls.

That way lies insanity.

It's interesting that the incoming BOE governor Mark Carney, has
admitted that we had a credit bubble, and not just a little one, but a
"generational" one  

http://groups.yahoo.com/group/eurorealist/message/56737

To what extent was this might have been a result of our Central
Banksters desires/efforts to promote "stability" is an interesting
question to ponder

I think I've answered that above. You can conceal risk through
derivatives, but you cannot reduce it overall, only add to it by
increasing complexity. If the bookmaker wins 51% of the time, no spread
betting is ever going to turn a profit in the long run*.

One can use fancy language, but that's what it comes down to. That
bubble will burst of its own accord. If you're arguing for a controlled
release of the pressure somehow, I'm right with you, butthe bigger the
bubble the louder the pop, so I'm not sure it's possible any more.

Perhaps we should ask the Spanish. They have very similar underlying
issues. It's simply that the euro has brought them into sharper focus,
earlier, than here.

S.

*I can't understand that twit in the US last week. Keynes' point was
clear: in the short run, demand management keeps things moving. In the
long run you have bought time, and can make the necessary public
spending reductions post-recovery. It's that last bit governments don't
do, and that's why "Keynesian" policies get such bad press. I find the
Keynes the man repulsive, but there's no doubt he was right about that
(let's leave fiat money for another day!).
-- 
S M
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