Oscar Wilde once said “A cynic is a man who knows the price of everything and the value of nothing.” Perhaps he might better have aimed the barb at economists, who tend to look at the economy solely in terms of money. Sometimes it is worth stripping away the money aspect, because it is at best a rubbery yardstick and at worst a conjurer’s wand, providing the illusion of wealth and success where neither exists. The Fed has used monetary policy to accelerate consumption. Easy credit and low interest rates encourage present consumption and discourage deferred gratification. The justification is that the demand for goods and services stimulated by credit results in more investment, thence more production, thence more goods and services to distribute around the population, thence a higher standard of living for everyone.

Unfortunately, this hasn’t worked out. More goods and services have been produced, but they have been distributed mostly to the self-appointed elites of government, finance, law, medicine and the boardroom. Most people are no better off, and in many cases worse off in real terms, than they were twenty years ago. Worse than that, people who thought they were amongst the better off are seeing their houses, cars and assets seized when they cannot pay their debts. Communities are left with streets of overgrown lawns and vandalized houses. Unemployment is rising. The industrial base has been eroded and moved offshore, where the citizenry has been more willing to defer consumption and invest in the education and training, the plant and equipment to produce the goods and services that Americans want. The country’s infrastructure is falling apart from lack of maintenance, let alone replacement or improvement. The education system is producing five times as many lawyers as engineers - because engineering is too hard. While the elites worship celebrity chefs, the use of food stamps is at record levels.

And yet the government has the nerve to claim that the economy is growing. No. America is consuming itself.

Paul Krugman, New York Times columnist and supposedly an expert, heaps scorn on the idea that trading in futures contracts might affect the price of a commodity, specifically, crude oil.

Imagine that Joe Shmoe and Harriet Who, neither of whom has any direct involvement in the production of oil, make a bet: Joe says oil is going to $150, Harriet says it won’t. What direct effect does this have on the spot price of oil — the actual price people pay to have a barrel of black gunk delivered?

The answer, surely, is none. Who cares what bets people not involved in buying or selling the stuff make? And if there are 10 million Joe Shmoes, it still doesn’t make any difference.

Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.

Paul, that is nonsense and if you don’t understand the futures markets you have no business writing about them. Some futures contracts are bets. An obvious example is the S&P 500 futures contract, which is a bet on the value of the eponymous index on a future date. However, the crude oil contract is not. It is a contract for the delivery of 1000 barrels of light crude oil to Cushing, Texas. Every contract is between a buyer and a seller of crude oil.

Any effect on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs.

As I’ve tried to point out, there just isn’t any evidence from the inventory data that this is happening.

Paul, this is also nonsense. The reason it is called a futures contract is because it is about the future. Futures contracts originated as early as the 17th. century in Japan for the delivery of rice. A farmer making the financial commitment today to plant his rice crop wants to be assured that he will be able to sell his harvested crop, and at a price where he will make a profit. So he sells a futures contract to lock in a sale of his future harvest. He doesn’t have the rice until he has harvested his crop. If his crop fails, he will have to buy rice from some other farmer to settle the contract (or pay someone else to take over his commitment). It is common for lenders financing mines to insist that the mining company sell the output of the mine in the futures market. Oil producers can sell their future output for the same reasons and in the same way. None of these futures sellers hold inventory against the contract, they are simply pre-selling their output. It is not rocket science to figure out that, for example, when a futures contract is deliverable, and the seller doesn’t have enough production because of, say, a strike in Nigeria, that seller will have to go to the spot market to buy crude to meet his commitments and thereby affect the spot price. Or maybe the seller was the aforementioned Joe Shmoe, who never had any crude to deliver in the first place? That’s the difference between a cash settled futures contract, which Joe could settle from his bank account, and the physically settled contract, where Joe has to go buy some crude oil. As the Nymex.com site says:

Crude oil is the world’s most actively traded commodity, and the NYMEX Division light, sweet crude oil futures contract is the world’s most liquid forum for crude oil trading, as well as the world’s largest-volume futures contract trading on a physical commodity. Because of its excellent liquidity and price transparency, the contract is used as a principal international pricing benchmark.

Now it is true that there are crude oil contracts that are cash settled, that are just bets. And it is also true that a seller of crude futures can offset his commitment at any time by buying a matching contract. But it is naive to think that the futures market does not affect the spot price.

Calculated Risk points out the story in the L.A. Times: Did Bank of America write the Dodd bailout bill? Well, what do you think?

By the way, there’s a lot of good stuff on Calculated Risk, it is a professional blog, unlike this personal not-for-money one, and so it gets much more work and attention. I read it and assume that most everyone does too, so I only note the stuff that I think is particularly important to record. This blog is mostly intended as a personal record of what I was reading and thinking through the end of the great bubble era. More the original concept of a blog, rather than the alternate media industry that is developing.

It is rare when I read something with which I agree 100%. Here is such a case, this succint interview with Jeremy Grantham (in the Globe & Mail).

You draw comparisons between what’s happening today and the start of the Great Depression.

We’re in that 1929-30 window, where we’ve had a shock to the system. But the secondary effects - less consumption, lower profit margins, lower GDP, lower employment, lower global trade - are beginning to work through the system. They’re steadfastly ignored because they’re still quite slight. It takes a year, 18 months [or] even longer for some of these effects to show up.

As the article notes, Jeremy, like me, got out of the NASDAQ bubble way too early. However, it is encouraging to note that his analysis and mine come up with the same answers.

In the move to suburbia that was driven by cheap energy, downtown housing was either abandoned or turned into rooming houses for the poor. As CNN points out, this is probably reversing itself as 90-mile commutes become objectionable and we have a huge surplus of suburban Mcmansions.

This change can be witnessed in places like Atlanta, Georgia, Detroit, Michigan, and Dallas, Texas, said Leinberger, where once rundown downtowns are being revitalized by well-educated, young professionals who have no desire to live in a detached single family home typical of a suburbia where life is often centered around long commutes and cars.Instead, they are looking for what Leinberger calls “walkable urbanism” — both small communities and big cities characterized by efficient mass transit systems and high density developments enabling residents to walk virtually everywhere for everything — from home to work to restaurants to movie theaters….

Recent market research indicates that up to 40 percent of households surveyed in selected metropolitan areas want to live in walkable urban areas, said Leinberger. The desire is also substantiated by real estate prices for urban residential space, which are 40 to 200 percent higher than in traditional suburban neighborhoods — this price variation can be found both in cities and small communities equipped with walkable infrastructure, he said.

The result is an oversupply of depreciating suburban housing and a pent-up demand for walkable urban space, which is unlikely to be met for a number of years. That’s mainly, according to Leinberger, because the built environment changes very slowly; and also because governmental policies and zoning laws are largely prohibitive to the construction of complicated high-density developments.

This is certainly what we’re hearing from people we know (and ourselves!). We try to avoid driving as much as possible, not so much because of the cost but because it is a pain. Although in fairness we don’t live in a city, it is a small community. But we walk to daily shopping, morning coffee, restaurants, banks and most of the routine services we use daily.