Letter to Editor of the Wall Street Journal that was never published.

From Mr Warren Mosler.

Dear Sir,

Chairman Bernanke has recently stated the following before Congress:

“…and futures quotes suggest that investors saw food and energy prices coming off their recent peaks next year.”

– Testimony, Chairman Ben S. Bernanke,
“The Economic Outlook” Before the Joint Economic Committee, U.S. Congress, November 8, 2007

It appears from this and previous similar statements that the Chairman is using the “futures market” prices of crude oil as a forecast of what prices are likely to be in the future. This is incorrect.

When a ‘non-perishable’ commodity like oil is in short supply, this condition is expressed by the spot price trading higher than prices for future delivery. When, instead, inventories are plentiful, prices for delivery in the future are higher than spot prices.

Clearly a commodity in short supply is not necessarily less apt to appreciate than a commodity where inventories are plentiful. Yet that is exactly how the Fed model appears to be programmed: the current backwardation in crude oil is viewed as indicative of lower prices over
time, rather than indicative of a product in very short supply, where spot prices can at least as easily go up as down.

Yours faithfully,

Warren Mosler
Senior Associate Fellow,
Cambridge Centre for Economic and Public Policy,
University of Cambridge,
Chairman,
Valance Co. 5000 Estate Southgate
Christiansted, St. Croix, USVI 00820
Office phone: 340 692 7710
E-Mail: warren.mosler@gmail.com

Professor James K. Galbraith
Lloyd M. Bentsen, Jr. Chair in Government/Business Relations
LBJ School of Public Affairs
The University of Texas at Austin
Austin TX 78713-8925