Speculation 101

One of the reasons I thought Michael Moore’s Capitalism, A Love Story was a career highlight is because of clips like this, in which our hapless hero tries to find out what a derivative actually is.

Says a former Lehman Brothers vice-president: “it’s a secondary bet on an underlying product, so you might have a stock, and you have an option on that stock, and the option allows you the privilege, but not the obligation, to buy or sell.” Sadly, it’s a correct definition, but it’s hardly an illuminating one.

Luckily, Olivier de Schutter, the UN Special Rapporteur on the Right to Food has come out with a discussion of financial speculation in food markets which includes a handy financial jargon decoder. Here, for instance, is his take on derivatives, which he explains as

“a financial instrument whose value depends on (or derives from) the values of other, more basic underlying variables”: it is therefore a financial instrument “which has a value determined by the price of something else”. This “something else” can be almost anything: it can be assets or commodities such as oil or wheat, or financial instruments such as securities or indices.”

Ok, so derivatives are inherently a little complicated. But it’s a good start to try to explain why they’re called what they’re called. And the rest of the report does a fine job in explaining why it is that the swings in food price markets are far from benign. Read it all here.

2 Replies to “Speculation 101”

  1. It’s a bit depressing that economics has seemingly become infected with a form of autism that makes it completely incapable of doing anything useful for people in society who produce things of real value (food, water — http://video.google.com/videoplay?docid=3930199780455728313#, housing, clothing, etc).

    I have to agree with Sorbonne economist Bernard Guerrien. The world needs to reject all aspects of the economic toolkit that do nothing other than let speculators offload risk and maximize interest paid on government legalized usury. It’s just a shame that more people aren’t familiar with Gresham’s Law. Maybe then they’d realize that since a fractional reserve system promises to pay specie in amounts greater than what actually exists that promise is a fraud perpetuated _via_ legal-tender laws.

    Thankfully some people, like this author (a man with a similar message to your own Mr. Patel),

    http://www.scribd.com/doc/33829028/The-Scarcity-Hypothesis-v2-1-0

    is willing to question the status quo and think independently. Though I’m sure the apologetics and institutionalized educational autocrats could care less about solving “problems” that to them are their bread and butter.

    Good video Raj. Keep fighting the good fight!

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