02 Jul

By Dr. Gary North 
for Gary North’s Q&A forums:

We have all heard the phrase,”Shoot the messenger!” We hear it in the context of someone who has brought bad news. The critic who warns against shooting the messenger implicitly recommends that we not impose negative sanctions against a person who brings bad news, simply because the news is bad. That seems right to me.

The relevant issue is whether or not the information is accurate. We want a steady supply of accurate information. We also want it presented in such a way that we will recognize the importance of this information, and then act appropriately in terms of it. We want both accuracy and motivation. It does not do us any good to know that something is true unless we act in terms of what we know to be true. We need motivation.

We also want to reduce the supply of inaccurate information. We don’t want our circuits overloaded with piles of inaccurate or irrelevant information. Also, we don’t want to be burdened with inaccurate information which is packaged in an effective, highly motivational way. We don’t want to be persuaded to do something inappropriate with reality, which happens to be appropriate with respect to inaccurate information.

We want to encourage the flow of accurate information, and we want to discourage the flow of inaccurate information. In other words, we want to impose positive sanctions on those who bring us accurate information, and we want to impose negative sanctions on those who bring us
inaccurate information.

We dare not abandon the principle of “shoot the messenger.” To abandon this principle would be to open ourselves to an even greater supply of inaccurate information. This, we presumably do not want.

We therefore have to make a decision as a society. We have to decide three things: which messenger to shoot, why, and who should shoot him. Entire civilizations are constructed in terms of competing answers to these two questions.


During the international housing bubble, which began in the mid-1990s and accelerated after 2001, nobody complained about speculators running up the price of housing. That was because anyone seeking a mortgage to buy a house was a speculator. He was trying to lock in the price of an asset with borrowed money. This is the classic mark of a speculator. But, since almost everybody was involved in this form of speculation, with the exception of renters, nobody criticized speculators, because so many people seemed to be benefiting from the speculation.

The housing bubble popped in 2006. People who bought homes after 2004 find today that they have lost money. Still, they don’t think of themselves as speculators who made a bad decision in entering a highly speculative market. Almost no one believed in 2005 that real estate had become a highly speculative market. I did, and I told subscribers that the market was overpriced, but there were not many people sounding the alarm in 2005.

We don’t hear criticism of speculators who caused the run up in real estate, and who therefore are to blame for today’s losses, because we are the speculators who did it. We have met the enemy, and he is us. So, we blame mortgage brokers, unscrupulous lenders, and similar people who provided the money to just about everyone who wanted to be a real estate speculator. We are like Flip Wilson’s Geraldine. “The devil made me do it!”

The person we should blame, Alan Greenspan, is Mr. Untouchable, so almost nobody criticizes him. If there is a devil who made us do it, it is Greenspan.

Today, the price of oil is twice that it was a year ago. The media are filled with reports by politicians, newspaper editorials, and common people complaining about the fact that speculators have driven up the price of oil. Everyone is upset, except those speculators who went long,because we all use gasoline. We don’t like paying more for the gasoline we use. So, we criticize speculators for forcing us to pay high prices for gasoline.

I think the oil market is similar to what we saw in the housing market after 2002. I think the energy market is a bubble. We are going to see a decline in energy prices in the same way that we have seen a decline in housing prices. What goes up will come down, unless the Federal Reserve System starts inflating in earnest. But, when we are in the middle of a bubble, and especially when we are in the latter phases of a bubble, most people think we have entered a new era. They think, “This time it’s different.”

There is no doubt that one of the factors in the rising price of energy is the fact that India and China are beginning to demand more oil. Hundreds of millions of people have gotten richer, and one of the things that newly middle-class people do is to buy a car. This should not come as a surprise to anybody.

There’s no question in my mind that, long term, the price of energy will increase. Entrepreneurs will seek out ways of cutting the cost of energy by discovering new ways to conserve energy on a cost-effective basis, and discovering new sources of energy. This is as it should be. If the price of energy did not rise, there would be much less motivation to discover new ways of saving energy and discovering new sources of energy.

This is the logic of the free market. When demand rises, prices rise, and there is no greater incentive for suppliers to seek out new ways to supply the demand than the hope of profit. It is a rational system.

But politicians who want to increase the power of the civil government over the public don’t like the free market system. That’s because the free market system solves problems effectively without many appeals to, or reliance upon, politicians. Politicians are generally irrelevant to the functioning of a free market system. Politicians don’t like to be irrelevant. They want to be highly relevant.

Most important of all, politicians want to be the people who hold the significant gun. One of the things that a gun is useful for is to shoot the messenger. So, any time that a politician can blame the messenger, he does. This increases voters’ confidence in politicians to hang onto the guns in order to shoot even more messengers.

Senator Joseph Lieberman has introduced legislation calling for restrictions on the creation of investment pools that invest in energy. He says that speculators are driving up the price of energy. He wants to keep them from driving up the price of energy. So, he wants more ammunition for the Federal government’s guns, which will be used to shoot the messengers.

Today, we see the Federal government seeking new ways to punish the greedy lenders who loaned money to people who brought homes that they could not afford. In other words, they want to shoot the messenger retroactively. We also see the same politicians considering legislation to use
taxpayers’ money to hand over to people who brought homes that they could not afford, so that they can stay in their homes. This is subsidizing people who listened to highly motivating messengers.

When the government subsidizes something, we will get more of it. This form of subsidy — retroactive bailouts — is called “moral hazard” by critics and “giving good people who made stupid decisions another chance” by proponents.

People who made these stupid decisions are (1) insolvent borrowers and (2) nearly insolvent multinational banks that lent them the money.

Note: the subsidy money that will go to insolvent borrowers will be used to make monthly mortgage payments to multinational banks. This fact is not mentioned by politicians who favor mortgage bailouts.

So, on the one hand, the government wants to put limits on highly motivating but supposedly crooked messengers (local mortgage brokers, and on the other hand, they also want to subsidize retroactively the people who listened to these highly motivating messengers.

I am not sure what message the politicians are sending. I know the message that I am hearing.”Politicians are dumb.” They do not understand economic cause and effect. So, they recommend policies that will both hamper and subsidize the same behavior. These are the sorts of people who supply government subsidies to the tobacco growers and then penalize companies that sell tobacco.

This goes on, decade after decade, and the voters never seen to figure out that politicians are economically dumb. They are worse than economically dumb. They are lawyers. They can vote themselves an endless supply of guns and ammunition.

We know who is holding the gun. The question is, who is it pointed at? Us.


Speculation is inescapable. Every time we forecast the future and then plan in our lives in order to meet this expected future, we are involved in speculation. Speculation is forecasting the future and then devising plans to deal with that future. It’s a simple concept. I suppose this is why Congress does not understand it.

A speculator who wants to remain a speculator very long does whatever he can to avoid influencing the market. The last thing he wants to do is to influence the market. The biggest single problem that a successful commodity speculator encounters is the fact that if word gets out that he is going to buy a particular commodity, other speculators immediately buy that commodity, and the profit opportunity disappears.

If you do not think I’m right about this, think about what Warren Buffett could charge subscribers for an e-mail newsletter that tells them in advance what stocks he plans to buy the next day. I think he could charge quite a bit. Frankly, I don’t think you or I could afford that subscription. But Warren is not going to offer that newsletter service. Does this surprise you?

The most important information that a speculator can get is accurate information about what the price of a commodity will be doing a specific period of time. A speculator does not make money by driving up the price of whatever it is he speculates in. He makes money by acting in advance of a price increase by purchasing the right to purchase a commodity during a specific time period.

The more leverage he can get by going into debt, the more money he will make if he guesses correctly and then sells his right to purchase the commodity to another speculator. In other words, a speculator is just like the person who wants to buy a house with 3% down instead of 20% down, and then sells the house later at a much higher price. The less he puts down today, the more money he will make on the transaction . . . if he guesses right about the price of the future house.

In the commodities futures market, it takes two to tango. For a speculator who goes long, meaning that he promises to pay money to buy a commodity in the future, there must be another speculator who goes short, meaning that he promises to sell a commodity at a specific price in the future. For every long there is a short. Whenever a speculator who puts his money on the line, and his credit on the line, in expectation of a rising price, there is another speculator who is doing the same thing in the expectation of a falling price.

In the commodities futures market, almost no one takes delivery of the commodity. The commodity futures market is a market of promises to do what almost nobody in that market ever does. It is speculation based on promises, not based on actual delivery. So, when somebody goes long in oil futures, he does not remove any oil from the market. The supply of oil is in no way diminished. I don’t think the general public understands this. I am absolutely sure that 98% of the members of Congress do not understand it.

I ask: “In what way do speculators drive up the price of oil?” For each speculator who is betting on an increase in the price of oil, there is another speculator betting on a decrease in the price of oil. There is still the same quantity of oil available for consumers to buy.

As I have said, a speculator makes his money by accurately predicting the direction of the price of a commodity and then putting his money and his credit where his prediction is. If he guesses correctly, he makes money. If he guesses incorrectly, he loses money. In every commodities futures contract, one of the participants is going to make money, and the other participant is going to lose money. The only participant who consistently makes money is the book for who sells them the contract.

Then what determines the prices of commodities? Consumers. Consumers compete against each other by building for the final output of a particular commodity. When you go to the gas station and fill your car’s tank, you are a final consumer of oil. You are in competition with other consumers all over the world who are deciding whether or not to fill their gasoline tanks. Those who do are your immediate competitors. Those who don’t are not yet your immediate competitors.

Here is the rule: high bid wins. This is the most fundamental rule of the free market. The free market is a gigantic auction, and the prevailing rule of an auction is this: high bid wins. We understand this with respect to auctions. If we applied this understanding to the entire free market, we would make very few intellectual mistakes about economic cause and effect.

The problem is, this principle applies in politics in a completely different way. It applies to voting rather than to economic production. The currency of politics is votes. The currency of the free market is digits (money). We consumers bid against each other for goods and services produced in the free market. We use digits to compete against each other. In order to get our hands on digits,
we must be productive (unless we are politicians).

What a speculator wants to know above all else is what the price will be in a specific period in the future for a specific commodity. He wants to know what the high bid will be for that commodity at some point in the future. He does not make his money by bidding up the price of the commodity above what consumers will be willing to pay for that commodity at some point in the future. He makes his money by purchasing the right to buy a commodity at some point in the future. His goal is to pay less today than what consumers in the future will be willing to pay. He is trying to lock in his purchase price today so that he can sell that right to some speculator in the future at a higher price than is paying today.

It is true that speculators can drive up the price of the commodity. But this process is not understood. Producers who buy a particular commodity in order to sell to consumers later use the information provided by competing commodity speculators to determine what the price of the commodity really ought to be.

If they see that the price of a commodity is rising in the futures market, they may buy more of this commodity now. If lots of producers do this, the price will rise. The way that the futures market drives up prices is by alerting actual producers to changed conditions in the market. The producers drive up prices because they expect consumers to drive up prices.

The price which is determined moment by moment on the commodity futures market is the message. The messenger is the speculator. Producers who use the futures market to find out the price of a commodity make an assumption: the best source of information regarding what consumers will be
willing to pay in the future is the commodities futures market. The commodities futures market is the most efficient, least expensive, most reliable source of accurate information regarding the future price of any traded commodity. Producers structure their plans on this assumption.

Congress thinks they are all wrong. Congress thinks Federal bureaucrats should manage the information-delivery system.

One more time: a speculator does not want to buy the right to purchase a commodity in the future if today’s price of the commodity is higher than what consumers, by competing against each other, will be willing to pay for that commodity in the future. If he believes that today’s price is higher than what consumers will be willing to pay in the future, he goes short. He buys the right to sell the commodity at a fixed price sometime in the future, on the assumption that the price of the commodity in the future will be lower than the price in he agrees to today.

He makes his profit on the difference between the price that he agrees to today to sell that commodity in the future compared to the actual price for consumers will be willing to for it.

Most people do not understand any of this. Yet they understand very similar transactions in their own daily experience. Here is an example. A man who makes his living by cleaning swimming pools may think that the economy is going to turn down, and demand will decrease for swimming pool cleaning services. So, he tries to get his existing clients to sign up for a year’s worth of swimming pool cleaning services at a discount. In other words, he goes short in the swimming pool cleaning futures market. He gets paid today to deliver services tomorrow. If the price of those services drops because of the recession, he keeps the money. He makes more money than if he had sold his services in a declining market.

I suppose that if the news media ever discover that swimming pool owners are going into the market to sign such contracts with swimming pool cleaners, Joseph Lieberman is going to try to get legislation passed to stop swimming pool owners from making these contracts. It’s clear that such owners are driving up the cost of swimming pool cleaning services, to the detriment of the People.

You think yourself, “that’s silly. Joe Lieberman won’t introduce that sort of legislation.” I add: “Not unless the media pick up the story.”

We can easily see that the whole concept is preposterous when applied to swimming pool cleaning services. We think that the commodities futures market is somehow different. It isn’t different. This same principle governs both markets: high bid wins. In both markets, it is competition on the consumers that sets the price. In both markets, it is the accuracy of the forecast that is crucial to profitability.


When the government intervenes to shoot the messenger, this increases the supply of inaccurate information. The free market, through the profit and loss system, shoots lots of messengers every day. It shoots millions of them every day. It doesn’t shoot them fatally in most instances, but it shoots them daily. It shoots them in the foot, mostly. Messenger by messenger, shot by shot, messengers who deliver inaccurate information are removed from the message-delivery system. This is as it should be.

It’s different with the government. The government doesn’t like the free market’s message-delivery system. Politicians want to place restrictions on the operation of this system. They want the system to become dependent on whatever the politicians tell the bureaucrats to permit. The politicians want to set the general rules regarding the shooting of messengers. They do not trust the profit and loss system to do this job efficiently and accurately over time. They assume that the profit and loss system is incapable of distinguishing accurate messengers from inaccurate messengers.

When the government interferes with the message-delivery system, it interferes with our ability as consumers to decide which information is accurate and which is inaccurate. In interferes with our ability to reward those messengers who deliver accurate information and penalize those messengers who deliver inaccurate information. It undermines the fundamental principle of the free market: high bid wins. It substitutes a different principle: submission to winners of contests for votes. It substitutes the principle of high bid wins in elections for high bid wins in the market.

If the government is successful in restricting speculators from entering the market place and competing against each other to determine what future consumers are going to pay, one thing is for certain: future consumers are going to pay more. They’re going to pay more because the information-delivery system is what producers rely on to estimate the cost of production. They will be hampered by the regulations imposed on speculators by the politicians. This will raise the cost of production, and it will therefore reduce the number of competing suppliers. With fewer suppliers, consumers are going to pay more.

If some speculators are convinced that the price of oil is going to go up, let them put their money and their credit where their mouths are. They cannot do this unless they find other speculators who are equally convinced that the price of oil is going to go down. May the best speculators win!

The enormous benefit to the consumer of the commodity futures market is that it enables producers to find out what they ought to pay, wholesale, to buy these commodities. Then they produce goods for consumers. Do we think we will be better off if the producers who compete for our money are unable to access better information?

Joseph Lieberman thinks so.

There is no more accurate source of price information than the commodity futures market, precisely because most speculators can and usually do lose money on their speculations. The general estimate is that fewer than 5% of all commodity futures traders make money long-term. The bad ones are eliminated from the market by competition. Because of the high leverage involved in these markets, the bad ones are eliminated very fast. The message-delivery system shoots poor commodity speculators with abandon. It doesn’t need Joe Lieberman to get into the business of shooting messengers.

If politicians interfere with the commodity futures market, as it appears likely that they are going to do, the result will be higher prices than what would have prevailed if they had stayed out of the regulatory business.

Then, when the bubble bursts, prices will be lower than what otherwise would have prevailed. Is this good? No. If prices are lower than what consumers would have paid, this will reduce the production of new forms of energy, new ways of delivering energy, and new ways of conserving energy.

The point is, consumers should determine the price of energy through competitive bidding on an open market. Consumers are assisted in this process by speculators. Speculators put their money where their forecasts are, and the result, through intense competition, is accurate information.

Anyone who thinks that the Federal government ought to interfere with this process is saying, in principle, that he thinks that government-salaried bureaucrats, who do not put their own money on the line, are the most competent people to devise the rules governing the process by which the future price of a commodity ought to be. I do not share their optimism regarding Civil Service- protected bureaucrats.


The journalists who write the stories about commodity speculators driving up the price of oil are as ignorant as Congress. The difference is, journalists don’t hold guns. They do not point these guns at the bellies of speculators who are attempting to make money by forecasting future onsumer demand.

My view is that it is safer to let speculators deal in pork bellies than it is to let Congress deal in speculators’ bellies. They will shoot the message system.

I believe we are in a recession. So does Warren Buffett. I think it will last longer than the typical
recession has lasted. So does Warren Buffett. I think this recession will be worldwide. I think it will lower the demand for commodities. This will include the price of energy. The recession will drive down energy prices.

Joseph Lieberman will drive up energy prices. Frankly, I prefer a recession to Joseph Lieberman.


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