Nobody likes to starve, regardless of their race, religion, political orientation, or whether you live in Jordan, Yemen, Tunisia, Egypt or America. But curiously what has, in large part, been driving the sudden revolutions has been the spiking prices of food in the Mid-East and Europe, leading to empty bellies. And behind it, as Ed Schultz reported at MSNBC, has been the rampant speculation of Wall Street in food commodities, driven by no less than Goldman Sachs.
First of all, trading in futures of commodities like corn, wheat, soy, was one way for American farmers, suppliers of food, to keep their business prices stable. Even when prices spiked for corn, et al, they could try to hedge their bets by signing futures contracts to lock in prices for some point in the future. Their locked-in price was their protection to plan on selling at a set price to make their living.
But along came the specter of speculation in Commodities Futures Trading, driving the prices for contracts higher and higher by unscrupulous traders to corner markets. FDR had noticed it in the Great Depression, the worst time for it happen. FDR responded by signing into law Position Limits. These were limits on how much the total betting could be done by Wall Street on commodities. And it worked to stabilize farmer’s sale prices to food companies and consumers. The price of what was driven by fundamentals like the weather could be accounted for and absorbed by the contract.
The law worked well until 1991, when Goldman complained to then president GHW Bush that Wall Street’s role in Commodity Futures Trading should not be stifled by Position Limits. Goldman was looking for new places to put their money and Commodities Futures Trading fit just fine. Great economic thinker that he was, GHW Bush said yes. He asked the Commodities Futures Trading Commission to give a waiver on Position Limits to Goldman Sachs. A dozen other firms followed suit.
Goldman created commodity indexes (lists of items) as well to simplify the betting and give a lift to investors into the casino economy. Again, Wall Street followed suit. As the Wall Street bubbles burst for dotcoms first, housing, and subprime mortgages later, Goldman withdrew its positions in them quietly and ramped up their bets on commodities. And here’s where I depart a moment from Ed’s thinking.
Unfortunately in 2000, Clinton signed the deadly Commodity Futures Modernization Act, which was supposed to regulate all derivatives, including commodity futures. But the CFMA essentially deregulated the entire derivatives market, including energy derivatives, as abused by Enron, and credit-default swaps, which allowed AIG Financial Products to binge on unlimited amounts of risk, and gave commodities futures trading a cart blanche. It was a disaster.
Enron became the largest corporate fraud in history, while AIG’s bailout cost U.S. taxpayers hundreds of billions of dollars that were desperately needed elsewhere. But the most pernicious effect of the CFMA wasn’t so much financial as political. It marked the point at which Washington became completely owned by Wall Street. Those who opposed the act were dumped; those who pushed it through were rewarded. Financial laws still can’t get passed unless and until the banks want them enacted. And we’re all suffering the consequences.
By 2008, Wall Street had five times more futures contracts in commodities than it did in 2002. Commodity indexes weighed in at about $13 billion in 2003. By 2008, commodities were over a quarter of a trillion dollars, sort of like how we got ourselves into the oil bubble, with prices inflating to $150 a barrel. And the combination of high cost fuel to transport higher-costing food became a double whammy to consumers.
By 2008, the UN estimated that the speculators held 65 percent of corn contracts. They held 68 percent of soy contracts; 80 percent of wheat contracts. The International Medical Group (IMG) food index jumped more than 80 percent up from a year and a half before. It was the first time in history, as Ed Schulz, pointed out that the proportion of people going hungry worldwide went up. The number of chronically malnourished people rose by 75 million in 2007, 40 million in 2009. That happens to be when Egypt’s riots began.
In Europe, Italian mothers marched against the spike in the price of pasta, thanks to Wall Street speculation. In 2006, Merrill Lynch said speculation accounted for 50 percent of the price of commodities. In 2008, a Goldman Sachs research paper said, “without question income increased. The fund flow from commodities has become a booster of prices.” In 2009, even Republican Senator Tom Coburn admitted that speculation “helped to inflate futures prices and thereby disconnect futures from cash prices, farmers and grain operations.”
Even Goldman admitted there was so much Wall Street money distorting prices that farmers and others who actually needed commodity futures couldn’t use them to stabilize their companies any more. Perhaps we didn’t notice our price hikes here in the US. As Schulz points out, half of our food prices come from marketing and packaging.
But in the underdeveloped countries, food, a sack of rice was a sack of rice, at 50 percent higher in price thanks to commodities speculation. And if it cost that much more, there was that much less to eat or spend for everyone. NBC’s Dylan Rattigan pointed out to Schulz that exacerbating the commodities problem was the excessive printing of money by the Fed, White House, and Treasury to the point where there was more paper currency in the world than there was commodities. All commodities theoretically equal all the currency in the world.
Nevertheless this doesn’t stop The Fed, White House or Treasury from trying to paper over the deficits, watering down the dollar’s value, a kind of hidden inflation. A good deal of this printing is to cover up the bank theft that has been an additional factor in causing commodity prices to jump even higher. So in addition to speculative aspects, the thefts are quietly bankrupting us well. And this impacts again on the world economy, including the USA’s. The real question is when will Americans be at the razor-wire barricades, shouting for democracy and a new regime? Perhaps if they’re brave enough, they’ll get theirs as well.
Jerry Mazza is a freelance writer, life-long resident of New York City. An EBook version of his book of poems “State Of Shock,” on 9/11 and its after effects is now available at Amazon.com and Barnesandnoble.com. He has also written hundreds of articles on politics and government as Associate Editor of Intrepid Report (formerly Online Journal.