William F. Buckley was right. "Stop!"
A recent WSJ article on the problem quoted research results and used the example of wheat. It is estimated that for a particular crop (future crop, mind you), there are twice as many holders of contracts for this crop than can be met.
Got that? Let's say the crop is going to be 100 bushels, and we have 1 bushel per contract. Well, there are 200 contracts that think that they own the crop, collectively.
How has such idiocy come about? Such spiraling is a natural consequence of taking speculation too far (see Minsky's ideas about this).
And, we do not know how wide-spread is this type of foolishness. You see, it goes way beyond those physical things we deal with as commodities.
In finance, thankfully, we had SOX to address this type of fictional book cooking. That the underlying mechanisms are supposedly founded on advanced mathematics does not remove the fiction, actually it exacerbates the problem.
One irrationality involved here is that when the crop does come about, what we will have will be higher prices due to the shortage of supply. Oh yes, the market works it out is the tenet.
Folks, those who like to line their pockets play the same sort of game with leverage. That is, from a finite collection of items with value (and these can be many types), they blow up to states that claim to be hyper-values and that are essentially hot-air. Perhaps, those who use the adage that the 'whole is greater than the sum of its parts' understand.
By the way, a physical product, and its development, can have similar problems; yet, engineering, hopefully, can keep things more grounded.
The financial folk can be similarly reined in, given that we apply the proper insights.
Remarks:
11/04/2010 -- Big Ben is still putting us at risk and trashing the savers.
01/27/2009 -- Lessons to be learned (as opposed to learnt), including, by necessity, Ponzi.
11/26/2008 -- The mess grew and grew, fairy dusting indeed.
08/24/2008 -- An example where we saw a 9 to 1 increase off of $100K was equivalent to a reserve ration of 10% which can be considered a historically low figure for the reserve or a high multiplier. This notion is related to leveraging in the sense of creating something out of nothing from one view. Of course, as argued before, the lowering of the reserve ration goes hand in hand with increasing use of mathematics through growing computational prowess which can exacerbate the Minsky ponzi tendencies, as we've seen of late. If we're going to model the economy via computation, why not base it on some physical analog, like energy (no endorsement intended)?
Modified: 11/04/2010
11/26/2008 -- The mess grew and grew, fairy dusting indeed.
08/24/2008 -- An example where we saw a 9 to 1 increase off of $100K was equivalent to a reserve ration of 10% which can be considered a historically low figure for the reserve or a high multiplier. This notion is related to leveraging in the sense of creating something out of nothing from one view. Of course, as argued before, the lowering of the reserve ration goes hand in hand with increasing use of mathematics through growing computational prowess which can exacerbate the Minsky ponzi tendencies, as we've seen of late. If we're going to model the economy via computation, why not base it on some physical analog, like energy (no endorsement intended)?
Modified: 11/04/2010
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