Adrian Douglas: CFTC conceals the real problem, the infinite dollar

By Adrian Douglas
Tuesday, July 28, 2009

Today's hearing by the U.S. Commodity Futures Trading Commission to discuss speculation in futures markets is a sham, a kangaroo court.

Notice that the concern of the CFTC is only why oil went up last year. The commission has no concern as to why oil fell so abruptly from $147 down to $35 even though Don Coxe was widely quoted at the time as saying the government had instigated a massive takedown. The commission's focus is on commodities of "finite supply" and preventing speculation.

Until about 10 years ago the world was always living with a glut of commodities, and particularly the most important one, oil. Technology had allowed the production capacity of oil to always grow much faster than demand. This is why OPEC was always trying to impose production quotas, but they had little effect as poor discipline always led to oversupply. In the first half of 2008 the world was struggling to produce enough oil to meet demand. In 2007 we saw a rice shortage and producing countries put restrictions on exports. We saw a shortage in corn as an ill-fated plan to solve the growing energy crisis involved making ethanol from corn.

Shortages in commodities lead to higher prices. The response of the U.S.-aligned crony capitalists over the last decade was to foster a derivatives monster to manipulate prices down even as shortages began. The over-the-counter derivative market grew to $1.4 quadrillion, 20 times bigger than the GDP of the whole world. This gets little discussion in the press.

Derivatives were the mechanism by which the United States and its allies tried to defy the laws of economics and push down the price of things in short supply. It worked for a while but it is now failing. Commodity prices and in particular oil prices are rising rapidly again. There is nothing to say that shortages can't exist in the middle of a recession. In fact it is the hallmark of inflation and hyperinflation. In Zimbabwe there is a shortage of everything.

History shows that when monetary inflation starts to be evident in the prices of real goods, the first thing governments do is impose price controls. Here we have exactly that in a new way. The CFTC is trying to find a way to disadvantage those on the buy side of commodities of "finite supply." In effect the commission is trying to control prices in the guise of preventing excessive speculation.

The very term "finite supply" means there is a supply crisis in commodities. If these commodities were in abundance, the free market would deal with speculators automatically, because as they drive the price up, the producers produce more and the price comes down and the speculators lose their shirts. What the government would likes to happen is that, as the speculators drive up prices, instead of the producers producing more, the anti-commodity cartel produces more paper promises of more production so that speculators lose their shirts. When the buyers are not speculators but buyers who want delivery, the game ends.

The implication of the CFTC's hearings is that this is the end of the game and the start of a super-bull market in commodities. The problem is not speculators. The problem is the commodity of infinite supply -- the U.S. dollar. Trillions are being created and are chasing commodities of finite supply. Economics tells us what the result will be with or without the King Canute policies of the CFTC.

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Adrian Douglas is editor of the Market Force Analysis letter (http://www.MarketForceAnalysis.com) and a member of GATA's Board of Directors.

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