Chapter 7. Speculating on Speculation

Every day, traders buy and sell thousands of contracts promising future delivery of wheat, corn, rice, soybeans, cattle, hogs, milk, sugar, and a number of other food products. The prices of these futures contracts rise and fall because of the buy and sell decisions made by market participants. If everybody tries to sell at the same time, prices fall until buyers are found; if everybody tries to buy at the same time, prices rise until sellers show up.

When food prices shot up in 2007 and 2008, many people blamed market speculators. They argued that traders had pushed the prices of food, oil, and other commodities above levels justified by market fundamentals, resulting in a speculative bubble. When prices ...

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