So what else happened Wednesday? Believe it or not, there was a tiny smudge of good news revealed at another of the historical firsts that are coming so fast and furious that the day’s incidence of historical firsts is itself a historical first. This first was the first ever press conference by the Federal Reserve. Sure, you’ve seen Ben Bernanke on the news before squawking about this or that but this was the first time the Fed apparatus has ever had a presser just like Barack Obama or Orly Taitz where it is convened for the communication of specific info with questions attending. This might seem to be a rather threadbare “first” until you understand that the Chairman of the Federal Reserve and even the dozens of lesser figures who make monetary decisions have a power to influence markets that, believe me, they often wish they did not. The business press is always rumbling with the seismic analysis of Bernanke’s footsteps. How does he look? Chipper? Dour? Conscious? Did he get the thai chicken or a steak? Is he out shopping for new suits? Custom? Please god, tell me he’s not buying off the rack!

Fortunes are made and lost by the labors of the business paparazzi because Bernanke’s whims make dollars worth more, or less. Overnight. Like Midas, he turns things to gold. And also kills. What a gig, huh? This is why meetings of the Fed Board are closed and the suits that comprise it usually slow to speak. Well, this is another dusty anachronism we cast away in the name of Change. But, perilous as this maiden presser was, the first whiff, to me, was pretty refreshing. Bernanke declares victory and goes home on the subject of QE2, Quantitative Easing the Second which is a scheme to prevent asset deflation by buying up Treasuries from big investors with the understanding that they will take the money and invest it in private securities like stocks. If you were wondering how it came to be that the Fed is now the largest holder of US debt, this is it. The good news is that this malign bit of economic plate-spinning will not be repeated. Another $600b of borrowed money will not be borrowed to do this all again even though six months ago it was seriously considered. This might not sound like much of an improvement but it at least implies, if not actual learning on the part of our fiscal overlords, at least some recognition that there are practical limits to money printing. Beggars can’t be choosy.

My good opinion of Bernanke’s bon mots was the exception though. Traded gold delivered a negative assessment by climbing to a new dollar high, popping up at every syllable and continuing up like a well-launched kite. Silver jumped, too. Oil however, the commodity on everyone’s mind, was basically flat. Mysterious marginal movements like this are the bread and butter, the lifeblood of those mean old speculators you hear so much about.

The anonymous army of guilded weevils who trade paper in blank rooms are largely responsible for the current outlandish price of oil. That is the line anyhow from Obama to OReilly. It is definitely something to look into. When the Saudis or Exxon say that there is oil and gasoline to meet demands, it seems they are right. Demand is up, but from previous dips. Supply looks shaky from a quick review of the news but the flow has scarcely altered, Libya be damned. It must be those speculators. But on what do they speculate?

Lately they predict only one thing in the oil market, that prices will go up in dollars. The vast oil shale developments and new marine oil fields hardly register on the dollar price escalation. Bad news on economic growth, implying weaker demand, likewise does not have its historical depressing effect. There can be only one explanation and it is simple but not easy. Let’s call it the Bernanke Effect. It is nothing more nor less than currency inflation. In gold, silver and agricultural commodities, oil is actually just about stable. But we don’t fill up our tanks with gold doubloons, at least not yet. We use dollars, yen, euros and yuan; all of these are “fiat currencies” meaning they are backed by the Full Faith and Credit of their issuing government. And nothing else.

This is the bedrock on which the speculators build their mansions. They are certain the value of fiat currencies is going down. Aren’t you certain of the same thing? There are relative slips and bumps. We may be up against the yen, which makes those big screens a little cheaper but then we are down on the euro, which cancels our trip to Madrid. But ALL PAPER CURRENCIES ARE IN A COMMODITY CRUNCH. Every damn one. And not just metals. Corn has other reasons to soar (can you say ethanol?) but it leads where all agris are going. Up. This simple fact apparent to all who buy milk or movie tickets is the genius “bet”. So really there is very little “speculating” going on as the traders anticipate as we all do, generalized global inflation from continued Bernankism around the world. There is a case to be made that speculation accelerates it, though. Shall we put a stop to it? There are a couple “solutions” to the Reign of the Speculators. None have great promise. The first and most practical cure for so-called speculation is to have a regulation or law in place that no one can traffic on the oil market who does not have the physical ability to store, transport or consume the volume of oil they are bidding on. This would make certain that only those with real economic purposes in mind for the juice will be buying it, right? Yes, except that doesn’t exclude very much of the trading market. It is the oil producers, shippers, refiners and wholesale consumers who are doing the bulk of the trading now. But even with the “actual use” restriction in place, there are work arounds. Contracts for oil storage capacity can also be traded as can transport. Joe Shmoe at his computer in Sheboygan can lease a tanker in Hong Kong (or a fractional share, like a lake condo) and satisfy the legal requirement. In large measure this already goes on. Supply contracts to deliver 500 barrels of Light Sweet Crude to a chemical plant in Jakarta likewise are as freely exchanged as wanton glances in a disco, and about as stoppable. End margin plays, you say? Allow only cash backed transactions? You can do that but you might as well just shut down the whole contraption since what is illegal yet lucrative in Chicago will then be duplicated in Mumbai. While it might be fun for the rest of the nation to see Chicago stripped of much of its reason for existing, the new exchanges will not be working in greenbacks, very much to our detriment. Oil is liquid, you know.

We are all speculators anyhow. When you buy a gallon of milk instead of a half, because it is less than twice as much, you are speculating that you are going to beneficially consume that White Gold before it goes sour. When you top off your tank prematurely because you think gas will be a nickel higher next week (a very good guess) you are speculating. What effect would some kind of legal or regulatory banning of such decisions have? If anyone claims it would be helpful or even possible you have a real career ahead of you if you can plausibly explain how.

There are good effects, too, from speculations. I diverge from the gold and silver traders in my assessment of Bernanke’s statement from the consensus that it is Bad News on inflation, meaning more. They base this on his responses to questions that seem to indicate that this genius of finance does not understand (or perhaps has never even heard of) the relation between the supply of money and the debasement thereof. Contrarian Me has never thought otherwise but sees in the timely end of QE2 the revealing bruise of close contact with Reality. I’m bullish on Reality. You should be, too.

 

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