Tue, 22 Aug 2006

Speculators Blamed

"Speculators Blamed" comes the cry in Monday's Times of India. I'm in Mumbai this week, working for Rediff.com, India's premier web portal. People are concerned about the rising price of wheat, edible oil, and pulses. Speculators are being blamed for holding back stocks in anticipation of higher prices later.

I don't see the rationale behind blaming speculators for doing their job. Somebody has to plan for the future, and government officials show an alarming failure to plan beyond the end of their term in office. The function of a speculator is to pay producers at a time when nobody values their output, so they can later sell it for a profit when everybody is demanding it. Of course, this means that producers get paid less on average, but that's okay with them. They're usually not willing to take the risk that their product will have no market, plus it helps with their cash flow.

So why blame speculators? Because they're usually rich. It's not usual to merely break even in commodities markets, so the bad speculators go broke, and the good speculators get rich. They earn their money for the risks they take, so an informed person will not blame them for driving up prices that are too low, and selling products that are in demand, and making money for doing so.

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