Felix Salmon

Matthew Bishop and I have a fundamental disagreement when it comes to gold. There’s a “canary in a gold mine,” says Matthew: when the price of gold goes up, “it tells you we should worry about why it’s going up, and what it tells you about the value of paper currency.”

Whereas I think it tells you no such thing.

Essentially, we’re looking at two different things. Here’s a chart of the gold price, in green, versus the 30-year bond yield, in orange, over the past five years.

The long bond currently yields just 3.36%, which is the clearest way that the market knows of saying that there’s not going to be any nasty inflation in the future. If you want, you can even get an exact number, by subtracting the 30-year TIPS yield of 0.94%: the market is saying that over the next 30 years, inflation is going to work out at just 2.42%, on average. Which is not anything to get worried about.

Now TIPS are not a foolproof guide to future inflation, but gold certainly isn’t. Indeed, the bond market does more than undermine the gold price as a guide to future inflation: it actually provides a much more credible explanation for the gold price than an inchoate fear of future price increases. After all, if you want to protect yourself against inflation, you buy assets which throw off income which goes up when prices go up, like TIPS, or companies, in the form of stocks. Gold, on the other hand, throws off no income at all, and its price is just as crazy and volatile in real terms as it is in nominal terms.

And if you think that prices in the Treasury market represent an idiosyncratic flight to quality rather than a reliable guide to future inflation, then you can look at an even broader market indicator. As Peter Rudegeair notes, if you look at the $1.246 trillion in the 100 largest US corporate pension funds, more of it is invested in bonds than in stocks. And retail investors, too, are moving their money out of stock funds and into bond funds. Essentially, everywhere you look, the market is showing that it trusts the dollar and that it has no fear of inflation.

Of course, the market might be wrong. But Bishop isn’t telling us to mistrust the market, he’s telling us to trust the market — albeit just one tiny slice of it, in the form of the gold market. That’s silly. If you’re going to trust market signals, you should trust the big market signals which are sending a clear message, rather than the noisy and volatile ones which mean whatever you want them to mean.

Why is the price of gold going up? Simple: when interest rates are this low, bonds are increasingly unattractive as a source of yield, so you might as well just buy stuff — call it SWAG — instead. SWAG doesn’t have any yield, but then again, neither does cash, really. And when there aren’t attractive investments out there, then it becomes more attractive to spend money rather than to invest it. As a result, people spend their money on SWAG, and some of them even kid themselves while doing so that by buying their SWAG they’re making some kind of investment. They’re not. And they’re certainly not producing a reliable guide to the future status of the US dollar.

Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I’ve been wondering how on earth he possibly intends to do such a thing.

There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it’s all in one place, um, well, nobody has a clue what might happen. Here’s the best guess from the FT:

Venezuela would need to transport the gold in several trips, traders said, since the high value of gold means it would be impossible to insure a single aircraft carrying 211 tonnes. It could take about 40 shipments to move the gold back to Caracas, traders estimated.

“It’s going to be quite a task. Logistically, I’m not sure if the central bank realises the magnitude of the task ahead of them,” said one senior gold banker.

I put the ever-resourceful Nick Rizzo on the task, but he came up with little more: the market in physical gold is tiny, and largely comprised of nutcases. The last (and only) known case of this kind of quantity of gold being transported across state lines took place almost exactly 75 years ago, in 1936, when the government of Spain removed 560 tons of gold from Madrid to Moscow as the armies of Francisco Franco approached. Most of the gold was exchanged for Russian weaponry, with the Soviet Union keeping 2.1% of the funds in the form of commissions and brokerage, and an additional 1.2% in the form of transport, deposit, melting, and refining expenses.

It’s not much of a precedent, but it’s the only precedent we’ve got; my gut feeling is that Venezuela would be do well to get away with paying 3.3% of the total value of the gold in total expenses. Given that the gold is worth some $12.3 billion, the cost of Chávez’s gesture politics might reasonably be put at $400 million or so.

It seems to me that Chávez has four main choices here. He can go the FT’s route, and just fly the gold to Caracas while insuring each shipment for its market value. He can go the Spanish route, and try to transport the gold himself, perhaps making use of the Venezuelan navy. He could attempt the mother of all repo transactions. Or he could get clever.

In the first instance, the main cost would be paid by Venezuela to a big insurance company. I have no idea how many insurers there are in the world who would be willing to take on this job, but it can’t be very many, and it might well be zero. If Venezuela wanted just one five-ton shipment flown to Caracas in conditions of great secrecy, that would be one thing. But Chávez’s intentions have been well telegraphed at this point, making secrecy all but impossible. And even if the insurer got the first shipment through intact, there would be another, and another, and another — each one surely the target of criminally-inclined elements both inside and outside the Venezuelan government. Gold is the perfect heist: anonymous, untraceable, hugely valuable. Successfully intercepting just one of the shipments would yield a haul of more than $300 million, making it one of the greatest robberies of all time. And you’d have 39 chances to repeat the feat.

Would any insurer voluntarily hang a “come get me” sign around its neck like that? They’d have to be very well paid to do so. So maybe Chávez intends to take matters into his own hands, and just sail the booty back to Venezuela on one of his own naval ships. Again, the theft risk is obvious — seamen can be greedy too — and this time there would be no insurance. Chávez is pretty crazy, but I don’t think he’d risk $12 billion that way.

Which leaves one final alternative. Gold is fungible, and people are actually willing to pay a premium to buy gold which is sitting in the Bank of England’s ultra-secure vaults. So why bother transporting that gold at all? Venezuela could enter into an intercontinental repo transaction, where it sells its gold in the Bank of England to some counterparty, and then promises to buy it all back at a modest discount, on condition that it’s physically delivered to the Venezuelan central bank in Caracas. It would then be up to the counterparty to work out how to get 211 tons of gold to Caracas by a certain date. That gold could be sourced anywhere in the world, and transported in any conceivable manner — being much less predictable and transparent, those shipments would also be much harder to hijack.

How much of a discount would a counterparty require to enter into this kind of transaction? Much more than 3.3%, is my guess. And again, it’s not entirely clear who would even be willing to entertain the idea. Glencore, perhaps?

But here’s one last idea: why doesn’t Chávez crowdsource the problem? He could simply open a gold window at the Banco Central de Venezuela, where anybody at all could deliver standard gold bars. In return, the central bank would transfer to that person an equal number of gold bars in the custody of the Bank of England, plus a modest bounty of say 2% — that’s over $15,000 per 400-ounce bar, at current rates.

It would take a little while, but eventually the gold would start trickling in: if you’re willing to pay a constant premium of 2% over the market price for a good, you can be sure that the good in question will ultimately find its way to your door. And the 2% cost of acquiring all that gold would surely be much lower than the cost of insuring and shipping it from England. It would be an elegant market-based solution to an artificial and ideologically-driven problem; I daresay Chávez might even chuckle at the irony of it. He’d just need to watch out for a rise in Andean banditry, as thieves tried to steal the bars on their disparate journeys into Venezuela.

This chart comes from a presentation on commodity ETFs by my Reuters colleague Andy Home:

QE, of course, only happens when interest rates hit the zero bound, so it’s impossible to disentangle the effects of QE from the effects of G3 interest rates all coming down to 1% or lower. But the effect of all these investment flows is clear: if you look at commodities as an asset class, total commodity assets under management have risen from just over $150 billion at the end of 2008 to over $400 billion today.

The impossible-to-answer question is how much of that investment is leveraged, in one way or another. The lesson of the commodities crash is ultimately a hopeful one: it didn’t set off any panic, and Main Street didn’t suffer much in the way of visible losses. And I don’t think that Wall Street has a leveraged long position in commodities in the same way that it had a leveraged long position in subprime in 2008. So the systemic risks posed by any commodities bubble are probably small.

Still, this is clearly now a speculators’ market, and that’s bad news for commodity-reliant industries. They’re up against finance types, now, which is never a pleasant position to be in. The crash will come — but only after real-world end-users have hedged their needs at very high prices.

If you want to see market reporting done right, I can recommend the 2,000-word Reuters special report on Thursday’s commodities crash. It doesn’t just pick a random news event or gesture vaguely at “worries about economic growth” while saying what prices did: it looks at the mechanisms behind the market moves and what might have caused them.

It’s worth underlining that Thursday’s percentage declines in commodities like silver and oil would count as a full-on disaster if they occurred in the stock market. Commodities markets are rowdier places than stock markets, however, and the only people who really got hurt are sophisticated investors who can take their medicine.

The move was certainly accelerated by the rise of algorithms and high-frequency traders, who have moved quite aggressively from stocks into commodities of late. These black boxes can go from being very long to very short in an alarmingly short space of time, and I suspect that many of them made money, rather than lost it, in the volatility.

But there was also a sense that this move had to happen. Between early February and early May, the yield on the 10-year Treasury bond fell from 3.7% to less than 3.2%. That’s a massive move in Treasury yields, which indicates that market fears about inflation are abating significantly. At the same time, however, the price of silver — a classic inflation hedge — rose from $27 to $47. One of those two markets was wrong — and it was much more likely to be the thin silver market than the Treasuries. Silver was bound to fall in price; the only question was when.

When the inevitable silver crash happened, it took down other commodities like oil with it. That’s because of all the speculation in the market, and the fact that funds which speculate in silver tend to be exactly the same funds speculating in oil. When you get a big margin call in silver (and margin requirements on silver had just been raised before the crash), then you have to sell some of your other holdings to meet that call. And your most liquid holding is likely to be in oil.

At times of volatility, correlations move towards 1. We saw that in every market during the crisis, and we saw it again in commodities on Thursday. Which is why protecting yourself with diversification is so dangerous. Just when you need the protection, it disappears.

This is what a fat tail looks like: crude oil is down 8.8% today. According to my colleague John Kemp, who knows everything, the standard deviation of oil prices, on a daily basis, is 1.64%. Which means that today’s price movement is equal to 5.4 standard deviations.

In a normally-distributed world, 5-standard-deviation moves never happen. In this world, however, such moves can happen even when there’s no news at all. (Reuters, for what it’s worth, blames “concerns about economic growth and monetary tightening”, which is code for “we have no idea why this is happening, or whether there even is a reason”.)

I do think today’s price move should give pause to anybody who dismisses theories that high prices in oil or other commodities are the result of financial speculation. Clearly there’s no fundamental reason to explain this move: most likely the market was just very long oil, and does what it always does in such situations, which is to move in the direction which causes the greatest pain to the greatest number.

For most of us, these kind of intraday gyrations, rare though they are, are pretty much irrelevant. But they do inflict a toll on the economy, as companies feel the need to hedge such things. And all hedging operations involve some kind of profit for Wall Street.

All of which is to say that a financial-transactions tax looks particularly attractive on days like this. It would reduce speculation, and raise lots of money. What’s not to like?

I can highly recommend the big Reuters report on Glencore, a company likely to go public some time in the second quarter at a valuation somewhere in the neighborhood of $60 billion.

Even before the IPO, there’s lots of speculation about what Glencore will do with the proceeds, which could be $16 billion or more. Top of the list is further growth — a merger with Xstrata alone would probably suffice to push the capitalization of the combined company over the $100 billion mark. The deal will also mean a huge uptick in the wealth of Glencore’s partners, who currently cash out at book value. Given that the company is likely to trade on a multiple of 3x book, no one’s going to be doing that any more.

Glencore has been a highly secretive operation from its earliest days under Marc Rich, and constitutionally hates the transparency involved in being public. So if even Glencore is capitulating, what does that say about my thesis that the stock market is increasingly irrelevant?

For one thing, I think it says that Glencore is run by highly-aggressive traders who judge themselves and others on how much money they have. Billionaire CEO Ivan Glasenberg is no philanthropist, and neither does he feel, as many Silicon Valley founders do, that what their companies do is more important than how much money they make. Far from mistrusting speculators, Glasenberg is one. So the only real reason to stay private is the question of privacy. But Glencore already gives enormous amounts of financial information to so thousands of people around the world — it told Reuters that “full financial disclosure is made to all of the company’s shareholders, bondholders, banks, rating agencies and other key stakeholders.” As a result, anybody important who wants to know details of Glencore’s finances can probably find out pretty easily.

Going public will certainly mean more press for Glencore — and given what the company does, more press necessarily means more bad press. It’s hard to position yourself as a major force for global good when your main businesses are mining and commodities speculation, and when you generate a lot of your edge by being willing to do deals with highly-corrupt politicians that other companies won’t touch. But Glencore’s bosses are hardly the first people to make the calculation that for hundreds of millions of dollars, they’re OK with being hated.

There’s also a sense of statistical inevitability about going public. You can stay private for decades, but the option of going public will always be there, and there will always be charming investment bankers telling you what a wonderful idea it is. A single moment of weakness, and it’s done. And once done, it’s more or less irreversible. A unified and single-minded family like the Cargills can stay resolute — but that’s an impressive feat, and if Glencore starts draining Cargill’s milkshake after it goes public, even the Cargills’ resolve might waver.

This part of the Reuters report stood out for me:

Glencore’s arrival in the FTSE would intensify the London exchange’s shift into natural resource firms. Fox says the increasing domination by a single sector is a “big headache” for smaller British investors who want a diversified portfolio. “It concerns me as much from a financial perspective as a moral perspective,” he says. “Customers will not expect that when they invest in a mainstream UK growth fund that a third of their money will end up in commodities.”

The point here is that the stock market, at least in the UK, is becoming a commodities play — much as the Russian and Brazilian stock markets have been for some time, not to mention Canada and Australia. Betting on commodities is all well and good, but it’s not the same as investing in the economic growth of a country. “While the stock market is certainly not a perfect reflection of corporate performance,” Ira Millstein tells me, “it is one measure.” That’s true — but it’s a measure of declining utility. The Glencore IPO only serves to underline how the stock market is more of a reflection of global asset values and of financial speculation than it is of underlying corporate performance in the real world.

The WSJ is going big today on this shocker from Susan Pulliam, splashing it across the front page of both the newspaper and the website:

The hedge-fund industry has been rocked over the past year by allegations that fund managers reaped illegal profits by trading stocks based on inside information. The investigation of Mr. Pia and the case against Moore suggest that commodities trading also can be an insiders game—a market where big investors may be able to throw their weight around to move prices to their advantage.

Really: that’s the shocker. Apparently traders sometimes try to move markets in commodities! Which, of course, is something so ingrained in popular culture that they were making blockbuster movies about it back in 1983.

Is the problem getting worse? Pulliam suggests that it is, talking about “a kind of improper trading that regulators worry is becoming more widespread”:

Cases involving investors trying to artificially move commodities prices are nothing new. But abusive trading practices have become more prevalent, says Bart Chilton, a CFTC commissioner, because regulators, until recently, have lacked the tools needed to aggressively go after and punish wrongdoers.

Over the long term, supply and demand dictates prices in the commodities markets. What concerns regulators, for the most part, are efforts to move prices over the short term. The growing number of large investors speculating in commodities has created “aberrations” that can present the “opportunity for foul play,” says Mr. Chilton.

This doesn’t make a great deal of sense. Commodities markets have always been largely unregulated, so that in and of itself wouldn’t explain why this kind of trading might be increasingly common. And if the number of large investors in the market is growing, why would that increase the frequency of price aberrations, which are normally a symptom of illiquidity?

Pulliam concentrates on one trader, Christopher Pia, but the only activity she ever talks about involves him buying large amounts of a certain instrument in the hope that doing so would move the market. That might be abusive, but it’s also been a standard part of the commodity-trading arsenal for decades. It’s also very dangerous for the trader in question: if the market gets wind of what he’s doing, he can lose a huge amount of money very quickly.

What’s more, I’m pretty sure that Pulliam is off by a factor of 100 when she tries to explain one of Pia’s trades:

In 2008, for example, Mr. Pia entered into a trade under which Moore would get a $25 million payout if the New Zealand dollar rose to a certain level. Goldman Sachs Group Inc. was on the hook to make the payout. If that level wasn’t hit, Moore stood to lose $1 million.

As the trade’s expiration date approached, the New Zealand dollar was trading about 25 cents below the price at which the contract would pay out. Mr. Pia got clearance from top Moore officials to spend billions buying New Zealand dollars, hoping the currency would hit the set price, according to the person with knowledge of the trade. Fifteen minutes before the contract expired, Mr. Pia began buying billions of New Zealand dollars, lifting the currency to the price at which Moore was able to collect the $25 million, the person says.

Gary Cohn, Goldman’s president, later congratulated Mr. Pia on the trade, the person says.

The kiwi dollar exchange rate is certainly volatile, but no trader would ever dream of trying to engineer a move of 25 cents. A quarter of a cent, maybe. And as Goldman’s reaction shows, this is the kind of trade which is more likely to get respect on Wall Street than to trigger an investigation into market manipulation.

The investigation of Pia and Moore seems to be par for the course when it comes to these kind of things: allegations are made, questions are asked, and at the end of the day everything’s pretty inconclusive. The trader in question has plausible deniability (“Mr. Pia said his last-minute timing was intended to thwart rival traders who often would try and buy ahead of Moore’s orders”), and no excess profits seem to have been made.

It’s possible that the ongoing CFTC investigation into Pia’s trading will result in some kind of censure or sanction. But even if it does, that’s not big news, it’s just the CFTC doing its job. I know that this is a slow news month, but I still can’t see much of anything here, let alone the “Wild Trading in Metals” promised in the WSJ’s headline. I’m sure that Moore Capital accounted for most of the volume in palladium for a few minutes on a few separate days. But that really is not a big deal, and it’s pretty sensationalist of the WSJ to compare it to much sleazier and much more illegal insider trading or pump-and-dump schemes in the stock market.

With its latest stock-price plunge today, BP has broken three important psychological levels: it’s below book value, it’s trading at less than half of its 52-week high, and it’s worth less than $100 billion. The culprit this time around would seem to be the dividend. The company has been paying out a steady 84 cents per share per quarter, and that payment is now in jeopardy; as recently as last week, it seemed to be safe.

How does the retention of $3.36 in annual dividend payments justify a $4.50 fall in the share price? Well, so long as BP holds on to that money and doesn’t transfer it to shareholders, it can be forced to transfer it elsewhere instead — for instance to workers who were laid off from other oil companies upon the introduction of the moratorium on off-shore drilling. BP’s coffers are not at all a safe place to store shareholders’ cash: they can be raided by all manner of legal and regulatory eventualities.

But there’s another dynamic at work here: BP and Shell between them account for 50% of the dividends paid by UK companies every year. It seems quaint, but there really are a lot of far-from-wealthy people in the UK who live off their dividend income, and those people constitute a surprisingly large part of BP’s shareholder base. If BP suspends its dividend, the only way they can get money from their stock is by selling it.

If BP doesn’t suspend its dividend, it would seem to be approaching screaming-buy levels right now: a $3.36 dividend on a stock worth $30.42 is a dividend yield of 11%. Plus of course there’s the possibility of an exit via takeover. But the fact is that the government can and will trump all of those considerations; it’s certainly not going to allow BP to declare an enormous special dividend, sell most of its remaining assets to Exxon, and then plead bankruptcy when the cleanup bill arrives. If such a thing were possible, BP stock would surely be worth a lot more than it is right now. But, thankfully, it’s not.

Ken Vogel’s very good article on the rip-off gold merchants sliming their way around the broadcast punditosphere never attempts to guesstimate the total amount of money that’s changing hands here. But it’s clear that the gold bubble is bringing out some most unsavory profiteers, who are signing up right-wing talk show hosts as spokesmen and selling not bullion but coins, which they can mark up to basically whatever they like.

What I’m wondering here is how much all this eschatologolical rhetoric is affecting the actual gold price. Certainly it attracts buyers:

Peter Epstein, president of Merit Financial Services, which advertises on Beck’s show, says gold retailers expect favorable coverage from commentators on whose shows they pay to advertise. “You pay anybody on any network and they say what you pay them to say,” said Epstein. “They’re bought and sold.”

Beck, who through a publicist declined to comment for this story, addressed the Media Matters allegation on his Thursday show, saying “So, I shouldn’t make money?” And he made the point that he touted gold before he became a Goldline endorser, and urges viewers to study and pray before investing in it…

“I could care less what people think of him,” Merit’s Epstein said of Beck. “We advertise on Fox because it makes the phone ring.”

If a large number of people are buying gold coins after listening to the likes of Glenn Beck, you can be sure that even more are buying GLD. And eventually demand for gold coins is itself likely to show up in a higher gold price. But this trend is going to have to run itself out sooner or later: you only load up on gold once, after which your only options are to hold or to sell.

I’m not calling a top to the gold market just because it’s fallen for two days in a row following Friday’s job report. But I’m getting that feeling you get when your cab driver starts talking about buying calls on dot-com stocks, or your house cleaner turns out to have bought three single-family homes in Florida. The likes of Ron Paul have been riding this train for a long time. But now that pretty much every single right-wing pundit has jumped on board, I can’t believe it has much further to go.

(HT: Drum)

Izabella Kaminska has an interesting take on the record-high gold price, via Bedlam Asset Management: essentially, it’s rising because the big gold ETFs, like GLD, are so incredibly easy to buy and to speculate with. Gold is now something that individuals can easily trade in and out of daily — goldbugs are no longer just hold-it-until-you-die inflation hawks and eschatologically-inclined survivalists.

The implication, according to Bedlam, is that the whole swathes of ETF-linked commodities risk being dumped en masse, if and when the current wave of momentum fizzles out:

One or more of the smaller exotics will expire. Little notice will initially be taken. After a couple more, especially if in different sectors, there will be a rush to dump them all. The good and the bad will be forced sellers alike to meet redemptions. This will lead to an avalanche of physical gold, live hogs and cocoa being heavily sold into often thin markets, causing sharp price declines.

Remember: insofar as gold is being held by speculators, it isn’t safe. And GLD alone has more than $30 billion invested in it, much of that on margin. Where would gold be if even a fraction of that sum got sold at once? I don’t like to think.

The best kind of hedge is the one like Agustín Carstens put on in Mexico: he locked in high oil prices, and made billions when the price of oil fell. Sometimes, of course, hedges don’t work out nearly so well. Larry Summers, for instance, thought he was locking in low interest rates, but then saw rates fall even lower, and ended up losing billions of Harvard’s dollars.

And then there are the hedges which just don’t make any sense at all: like Barrick Gold, which locked in low gold prices and is now spending a whopping $3 billion to unlock them at the top of the market. Anybody care to explain that one to me?

Many congratulations to Agustín Carstens, who, according to Javier Blas, has managed to make Mexico $8 billion by putting on some smart oil hedges last summer:

Traders joked on Monday that Mr Carstens was probably 2009’s “most successful, but worst paid, oil manager”.

Of course, it helped that Carstens had $1.5 billion lying around last summer to pay for the hedges in the first place. But really all this financial cleverness only puts off the day of reckoning: Mexico is running out of oil revenues fast, and has no visible means of replacing the taxes currently paid by Pemex.

The tax burden on Mexican individuals and companies is low in theory and lower still in practice, and the kind of tax hikes which would be needed to even partially compensate for falling government oil revenues are politically impossible to pass. No one is more aware of Mexico’s coming fiscal crunch than Carstens, and if anybody can do something constructive, he can. I suspect, however, that no one can do anything constructive, and Mexico will be in serious fiscal pain sooner rather than later.

Back in March 2008, Diana Henriques noted something very odd: a large number of futures contracts traded in Chicago were expiring at levels much higher than the spot cash price. She said at the time that “economists who have been studying this phenomenon say they are at a loss to explain it”.

This very odd phenomenon — which caused farmers a lot of harm — has now been explained in a 247-page report from the Senate investigations subcommittee, entitled Excessive Speculation in the Wheat Market. The main PDF is here; there are exhibits and addenda here. The culprit, it turns out, is index traders.

The rise in the basis between the futures price and the cash price is a function of the rise of commodity indices, and investors buying a basket of commodities. This affected the wheat market particularly badly, as explained in footnote 213 of the report, partly because of the ease of storing wheat:

Aside from wheat, the other commodity markets in which index traders hold a substantial share of the long open interest are the futures markets for two livestock commodities, lean hogs and live cattle. Lean hog futures contracts are financially settled, meaning that the price of the expiring futures contract is set at the price of the commodity in the cash market at contract expiration. By definition, therefore, lean hog futures and cash prices will be equal at settlement, so there is no problem with convergence. Live cattle, unlike grain, cannot be placed in storage from one contract expiration to another. That constraint means there is always an active cash market for live cattle at contract expiration that helps to force convergence.

The Senate subcommittee recommends that the futures exchanges should curb speculation in the futures market in order to bring the basis between futures and cash back down to a reasonable level. It’s coming down already, but it’s still extremely high, at over a dollar a bushel:

This whole thing reminds me slightly of the way in which the USO oil ETF helped to exacerbate contango in the oil market. And in general, it seems that attempts by investors and banks to construct financial instruments which give simple exposure to commodities have not worked very well. Chalk up another failed financial innovation.

How to structure a gas tax? You could make it a flat X cents per gallon; alternatively (and this is essentially what a cap-and-trade system does, too) you could make it Y%, with the tax increasing with the price of gasoline.

Today, Jim Surowiecki comes up with a third option, where the tax decreases when the price of gasoline goes up:

Rather than leave so much of our fate to chance, we’d be better off doing what politicians always say they want to do: lessen the U.S. economy’s dependence on oil. One step toward that would be to phase in a gas tax designed to smooth out oil’s spikes and plunges by keeping the price of gasoline fixed (the tax would rise when the price of gas fell, and vice versa).

Surowiecki makes a strong case that consumer behavior, when it comes to reducing gasoline consumption, only really changes when there’s a spike in gas prices. As a result, his proposal would seem designed to have the least possible effect on gasoline consumption, and on our dependence on oil. Sure, it’s a sensible way of raising government revenues and reducing the fiscal deficit.

Either you want to effect consumer behavior and reduce gasoline consumption — in which case you actually welcome price spikes. Or else you want to smooth out price spikes, in which case you slowly boil the frog (to use one of the stupidest metaphors ever) and keep consumption high. But you can’t have it both ways. Which is it to be, Jim?

Ryan Avent and the MPG illusion both examine the “cash-for-clunkers” bill from the perspective of how much in the way of carbon emissions will actually be saved when someone takes advantage of it. But there are a few sums missing in these posts, so I thought it would be worth filling them out. Here’s Ryan, for instance:

For passenger cars, the incentive is reasonably ambitious: those moving from less than 18 mpg to better than 22 mpg qualify for $3,500 for a four mpg improvement and $4,500 for a 10 mpg improvement.

But standards quickly decline as you move up in size. For SUVs and light trucks one qualifies simply by moving from below 18 mpg to above 18 mpg. A $3,500 voucher is available for an improvement of just two mpg, while a mere five mpg improvement gets you the full $4,500 available.

The full table is here, but only in MPG form. In terms of gallons of fuel used per 100 miles, things look a bit different. Here’s how things work out in useful gallons per mile, rather than silly miles per gallon.

To get a $3,500 voucher by trading in a car, you need to move from 18mpg to 22mpg — which is an improvement of 1 gallon per 100 miles.

To get a $3,500 voucher by trading in a small SUV/truck, you need to move from 16mpg to 18mpg — which is an improvement of 0.7 gallons per 100 miles.

To get a $3,500 voucher by trading in a large SUV/truck, you need to move from 14mpg to 15mpg — which is an improvement of 0.5 gallons per 100 miles.

To get a $4,500 voucher by trading in a car, you need to move from 12mpg to 22mpg — which is an improvement of a whopping 3.8 gallons per 100 miles.

To get a $4,500 voucher by trading in a small SUV/truck, you need to move from 13mpg to 18mpg — which is an improvement of 2.1 gallons per 100 miles.

To get a $4,500 voucher by trading in a large SUV/truck, you need to move from 13mpg to 15mpg — which is an improvement of 1 gallon per 100 miles.

So Ryan’s absolutely right: the criteria for SUVs are much weaker than the criteria for trucks. Why do you need to improve by 3.8 gallons per 100 miles in order to get the $4,500 voucher on a car, when you can improve by just 0.5 gallons per 100 miles in order to get a $3,500 voucher on a large truck? It doesn’t make a lot of sense.