Is Correlation Causation?
There is no doubt that the rise in the investment in commodity indexes and the rise in prices correlate significantly. But does correlation necessarily mean that there is a direct cause and effect? Masters says it does. (Later we will look at arguments against this view.) As an illustration, he shows that the rise in demand for oil from China in the past five years has been 920 million barrels of oil per year. But index demand (the word Masters uses) for oil has risen by 848 million barrels, almost as much as another China. And Masters gives us facts that are interesting. There is enough wheat in the index speculator “stockpiles” in the US to feed every many, woman, and child all the bread, pasta, and baked goods they can eat for the next two years – about 1.3 billion bushels. Yet wheat has soared in price. As the prices of the indexes have risen, the demand for the indexes has grown. And these indexes are not price sensitive. If a billion dollars is invested in a given week, the index
