‘Markets funny, fed prints money
Says it sunny, lies like honey, too sweet for me’Â
commented by â€˜40 Years After – I would love to change the worldâ€™ in Â IMF: Fed Should Leave Rates Steady in the WSJ.
Inflation is a perception. So is money â€“ itâ€™s actually a paper. The real inflation figure of the US may not be much different than the ones now reported in China or India. Itâ€™s a jugglery of whatâ€™s measured and whatâ€™s not.
The gold peg was broken nearly 40-years before with the demise of Bretton Woods systems. Petro-dollar still goes strong.Â
In the recent oil summit, OPEC blamed it on speculators; the leaders of free market economies blamed it on supply-side. The answer probably lies somewhere in-between.Â
Was there speculation in the US housing market? Or was it productive economic activity gone accidentally wrong? There was no speculation, going by statements made by Bernanke in the past. Presently, the US gets more than 20% of its GDP from financial sector â€“ more than manufacturing!Â
Daily Nymex futures trading volume was nearly three times of the total daily global supply of 86 MBPD capacity of the world, when I last researched it more than couple of years back. Now itâ€™s close to 12 times, as Nymex reported. The open position I heard is close to $190 billion, and as Bloomberg also reported. The open interest holds global supply of 15 days. Thatâ€™s in Nymex aloneâ€¦there are similar exchanges in most nations, taking lead from Nymex.Â
At the same time, as per the structure of any derivative products, there is no net-wealth generation here. Oneâ€™s gain is otherâ€™s loss. However, for every dollar rise in crude price, all oil-bulls are pocketing twelve-to-fifteen times more money than all oil-producers are making, if not more. The oil-bears are again losing same money, true.Â
Tomorrow, in caseÂ one large US-based investment bankÂ with long position inÂ oil futuresÂ fail due to crash in Â oil prices, would Fed. take those long positions as it did for Bear Stearns, to save financial markets? If it does, the answer of the question on why oil is shooting high can be found.Â Otherwise it’s impossible!
OPEC would never be able to produce as much oil-equivalent of dollar as Fed. can produce dollar. After the gold-peg with dollar was gone nearly 40-years before, petro-dollar faces another test. However, OPEC enjoys the ‘head-you-lose-tail-I-win’ advantage, traditionallyÂ reserved for the US,Â in this blame-game .Â Â
Ranjit is an Associate ProfessorÂ at Indian Institute of Foreign Trade, andÂ is the author of the book Wondering Man, Money & Go(l)d. Â Opinion is personal.