Let Them Eat Bubbles (by Elizabeth Palmberg)
"Grain Markets Panic Buying, Export Controls, and Food Riots," trumpets the headline of one Web site I read while researching the world food price crisis for Sojourners' July issue. Was the site a moral critique of how our corporation-driven, anything-goes global economy has caused the cost of food to skyrocket, driving 100 million people into poverty?
Actually, the "food riots" headline is geared to telling people how to profit from others' suffering. The next sentence reads: "Long-term global demand and supply trends in the agricultural sector remain very favorable for investors." Morally repugnant as that segue is, the real problem is that speculation probably helped cause the food price crisis (in concert with other factors such as agrofuel production, rising meat-eating, and the gutting of poor-country farm policy).
Speculative markets are innately prone to stampedes, as we can see from the mortgage bubble, the dot.com bubble, etc., etc. Wild price swings are built into the system: It's the job of a money manager to buy commodities that will go up (helping to inflate bubbles) and sell them when they start to go down (helping deflate them).
Turning up the speculative heat is the fact that there's a LOT of money out there chasing investments -- double what there was in the year 2000. A recent NPR program, The Giant Pool of Money, spells out, in human terms, how the pressure that speculative money exerts was a recipe for disaster during the housing bubble.
While that bubble hurt homeowners and investors when prices deflated, food-market speculation hurts the world's poor as prices go up -- way, way up. Incredibly, many voices in the press fly in the face of reality by arguing that speculation somehow decreases the wild swings and bubble pricing of markets. For example, The New York Times recently argued that
... the more money that speculators are willing to put to work in the market, the more liquid it is and the easier it is to buy and sell without causing big ripples in prices.
If you believe that stampedes calm vibrations, I've got some subprime mortgage-backed securities to sell you. A more accurate description of how speculators act can be found in Washington Post humorist Gene Weingarten's interview several years ago with Nobel Prize-winning economist Robert Solow:
[Weingarten]: ... would it be your professional judgment that Wall Street, the principal bulwark of the American financial system, is at the mercy of persons with the maturity of kindergarteners -- or of preschoolers?
Solow: It's at the mercy of very, very nervous people.
Now, the world's poor are more than nervous. They're hungry. Very hungry.
Elizabeth Palmberg is an assistant editor of Sojourners.
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Comments
In reply to your claim that speculators cause prise rises, well they can and do, but only when they actually hoard the commodity in question, and/or intentionally try to stop production to drive up the price. Otherwise, the speculator ultimately has to sell, dropping the price. The food markets are sufficiently large that no one can come close to monopolizing it. The commodities markets are designed to transfer risk to those willing to risk it for a buck, from those who are unwilling to take the risk.
Now, it is very true that a growing population and increased meat consumption, in addition to the push for biofuels, are driving demand way up. Meat consumption is very inefficient w/r/t the usage of food. And food is what economists call inelastic. We can maybe all eat less, but we cannot not eat regardless of the price. The increase in prices is supposed to spur added cultivation (and I hear it has); however, I don't see the rationale for the continued biofuel subsidies. Subsidies distort markets; they shouldn't be granted without good reason. If we all ate lower on the food chain, things will hopefully get better too.
Posted by: Ngchen | July 1, 2008 5:27 PM
Ngchen,
Since last fall's harvest, I've been watching soybeans on the Chicago Board of Trade (CBOT).
At that time soybeans sold for around $6.50 a bushel.
There are a lot of ways to sell soybeans on the CBOT.
Our renter/grower sold his share on a futures contract at around $6.25 a bushel, well before he harvested his crop.
He won't do that again with this year's crop.
We kept our share in storage and watched while beans jumped into uncharted territory.
Storage of the bean crop at the elevator costs an average of 5 cents a bushel per month.
We sold our beans in early June of this year at $13.50 per bushel, less the storage fee and shipping from South Dakota to Chicago (about $1.25 / bu).
Today the price of beans settled at $16.28 / bu.
So in 8 months, soybeans have increased in value well over 100%.
Many farmers 'hoard' their crops in elevators while speculating on the price.
This is considered good business practice.
In watching the CBOT trading reports over this time frame, the major influences on price fluctuations after the fall 2007 harvest have been the devaluation of the dollar and the cost of the future energy involved in producing the 2008 crop.
Also important is weather in the Southern Hemisphere affecting that crop, lagging ours by 6 months.
Speculation is definitely a factor in the price of all food crops.
What's tragic about the world's food supply is that over the last several decades, 'free traders' have succeeded in removing trade barriers from most developing nations.
This allows American farmers to sell agricultural products into these developing markets.
But the unfortunate side effect of this open door trade policy has been to drive the local farmers out of business in those very nations that are currently experiencing overpriced food and hunger.
Free marketeers have seriously damaged the agricultural base in most third world nations.
They should acknowledge that free market economic religion is causing suffering in the real world.
Posted by: justintime | July 1, 2008 7:01 PM
Investing in food products is wrong ? I also make money from investing in envirnomentally driven corporations . Having the government take from another to give to another is more Christian like ?By all means , invest in corporations investing in food distribution , take those profits and donate to the needy .
Posted by: Ron | July 1, 2008 7:01 PM
Food speculators or no less than the man in the parable who stores up his grain and dies the next day. They are gambling on the future and if it doesn't pan out they lose everything, so they try to manipulate the future with scares and rumors.
This year the scare is the Iowa floods yet that only translates to 8% of the Midwest crop and does not reflect the California or southeast crops which are doing OK. But they will take advantage of the scare of food shortages and drive the price up. Even though the government is still paying farmers not to grow crops.
America needs to stop the subsidize and pay farmers to grow extra crops to lower food costs and help the underdeveloped countries who are in real famines.
Feed the needy not the greedy!
The same goes for the oil industry, make the laws the same for oil speculation as is for the crop futures.
Posted by: Paul Shiras | July 1, 2008 7:26 PM
Every nation (or geographical region) should have its own vigorous agricultural base for local food production.
Having an agricultural base provides a measure of food security in times of fluctuations in the price/scarcity of food commodities -- rice, corn, soybeans, wheat, etc.
This is why it was a catastrophic mistake to remove the trade barriers on food commodities of poor developing nations.
This act simply drove local farmers out of business with cheap imported foreign food commodities.
After developing a dependancy on cheap imported food commodities, there's insufficient local basic food production remaining to stave off local hunger and starvation.
Significant gains made in food production by the 'green revolution' are being eroded and once again we find ourselves watching hunger and starvation on TV.
Posted by: justintime | July 1, 2008 9:55 PM
The hunger crisis is such a critical topic for human beings to focus on right now - and I feel it is going to take many of us putting our heads and hearts together to change the tides. I just watched an excellent video on this by a Christian priest on you tube.
www.youtube.com/watch?v=HZ-3epxlCxU
In this video, Mother Clare Watts talks about how we must awaken our own compassion and pray for the awakened compassion of many. With awakened compassion more people will be inspired to act and help.
I pray that people in this world that have nothing would receive our prayers, and that out of this dialogue on Jim's blog and other efforts, a new way would come about to help all people on the earth.
In Christ's Love,
Sr Andrea
Dolores, CO
Posted by: Sr Andrea Cohen | July 2, 2008 12:12 AM
The Fed tried to prop up mortgage and credit markets by the equivalent of printing money, but only succeeded in creating a hyperinflation in the world's reserve currency.
The name "Bernanke" will become synonymous with an enormous folly that engulfed mankind in unheard-of suffering and eventually stoked world war.
Posted by: N.M. Rod | July 2, 2008 12:50 AM
Justintime wrote:
Many farmers 'hoard' their crops in elevators while speculating on the price.
This is considered good business practice.
You bring up an interesting point. After thinking over it some, I believe we have a situation analogous to a would-be cartel. Cartels try to drive up prices by jointly agreeing to limit production. But it's well known that if the number of cartel members is large, cartels do not work, because each member has an individualized incentive to "cheat." The perpetual OPEC squabbling over their members cheating on production quotas is a classic example.
The farmer who hoards soybeans hoping for price increases then takes the risk that prices may fall due to someone else selling rather than hoarding. The number of players is large. So it's unlikely one would be able to create an artificial shortage by one's actions alone or even in concert with a few other farmers. So any price increase is "real," rather than due to the action of a few individuals storing their crop. (For the record, it's well accepted that it's immoral to create an artificial shortage if one is capable of doing so; I'm simply arguing that it's not possible in the long run with food commodities given the current population.)
In terms of free trade hurting small farmers abroad, yes it is a problem. Ironically, the increasing price of oil might limit the effects by making foreign-grown foodstuffs less competitive due to high transport costs. What might be a bigger problem tied to that is the concentration of agricultural production into certain areas over time, making things much more vulnerable in the long run to a single disease, drought, or flood.
Posted by: Ngchen | July 2, 2008 6:42 AM
"The Fed tried to prop up mortgage and credit markets by the equivalent of printing money, but only succeeded in creating a hyperinflation in the world's reserve currency."
The Fed lowered rates to increase the money supply yes, but that is hardly the equivalent to printing money. We do not have hyperinflation. We have higher than desired inflation primarily because of the collapse of the housing market which led to a mass depreciation of assets. What do you mean by the "world's reserve currency?" The world has a currency?
"The name "Bernanke" will become synonymous with an enormous folly that engulfed mankind in unheard-of suffering and eventually stoked world war."
Whoa, whoa. Take a breath. "engulfed mankind in unheard-of suffering?" "world war?" What?
Posted by: DITE | July 2, 2008 7:31 AM
The money "loaned" by the Fed at real negative interest rates is created out of nothing. It is a simple increase in the money supply, equivalent to running mint printing presses non-stop, in a world where money is mostly digits in computer systems, not paper. Against almost all other currencies, the dollar has depreciated by 30%, even while those currencies have also been experiencing depreciation via inflation.
The United States dollar is the world's reserve currency. There are far more dollars held outside the United States than within. Other nations maintain huge dollar reserves, and commodities such as oil are priced in dollars worldwide.
The desperate moves by the Fed are the flailings of a man who made the study of the mistakes of the Great Depression his life's work. In his determination to avoid the credit deflation that occurred then, he has made the mistake instead of the Weimar Republic in trying to paper over impossible debt by pumping fiat money into the hands of the same speculators who instigated the problems. This did not solve the problems looming, which include mass unemployment, but has added another, inflation.
Many conservatives, since the administration most of them supported has been in power the past 8 years, and the legislative branch 16 years, have spent most of the past year echoing that there is nothing wrong fundamentally with the economy and that we are not in recession.
This is denial. Not so long ago, these same folk justified the Iraq intervention by using the argument of the disaster that would result if as a result of not doing so the price of oil were to hit $100 dollars a barrel or more, which they said would devastate the world economy and set off famine and wars.
It is now near $150 a barrel, a level that the most extreme prognosticaters had worried only weeks ago would occur by December.
We are in a world of trouble, and it has only just begun and denial will do no more good than it did in the months leading up to the Great Depression.
Posted by: N.M. Rod | July 2, 2008 9:05 AM
DITE, I missed your response to my position on globalization some time ago.
I haven't seen you on here since.
Posted by: justintime | July 2, 2008 10:17 AM
N.M.Rod,
In my opinion Alan Greenspan is more to blame for the present crisis in the mortgage industry and the American economy than Ben Bernanke.
Greenspan waved the green flag for Bush's tax cuts and deficit spending, presided over the devaluation of our money and promoted the adjustable rate mortgage, leaving Bernanke with a big mess to clean up after the bubble burst.
Posted by: justintime | July 2, 2008 12:08 PM
Alan and Ben are after all not men who acted alone. Their bad decisions were hardly theirs alone or even those of the Federal Reserve, though the much-diminished buck must stop there.
Whether Bernanke is as complicit with the cause as Greenspan is another matter; but he is the spear carrier for the mistaken idea of stopping the deflation of recession by creating inflation, mostly to staunch the negative balance sheet figures of the worst speculators on Wall Street, which just happen to be the major U.S. financial entities.
It doesn't fix the fundamentals; the investments remain bad. It just adds even more chicanery into the mix and destabilises the system further - though it shifts and magnifies the pain away to the greater society, instead of to those who caused and benefited from the speculative bubble they manufactured.
And there is no doubt the infusion of inflationary cash to them is causing them simply to find new speculative vehicles using the same sort of behavior in pursuit of even more desperately needed profit levels.
As in all inflationary money expansions, the first recipients of the devalued currency are the ones to benefit, while it quickly loses value as it passes through the economic foodchain - and those at the end of that chain are left with all the inflationary stimulus value sucked out of what they are left holding.
Everywhere and always, they get the high prices long before they see any extra stimulus themselves.
The recent "stimulus payment" is a one-time inflationary sop to put the temporary boost of such measures at the endpoint, for political reasons in an election year - hence its bipartisan support. It's like having "one for the road," the buzz before you head out on the highway to get creamed headon.
Posted by: Sojourner Truth | July 2, 2008 12:34 PM
I'll second that one, sojo t.
Posted by: justintime | July 2, 2008 1:10 PM
DITE,
Here's where we left off in our discussion of poverty back in May:
...
DITE: "Why do you trust Bush’s own Treasury Department that you cited earlier in this comment section but not his Labor Department?"
...
justintime: I trust Bush's Treasury Department even less than I trust his Labor Department.
I don't trust his EPA, his Interior, his Homeland Security, his Justice or his Defense Departments either.
The Bush administration has so thoroughly cooked our books it will take a generation to sort out the stupendous mess they made.
I'm not denying World Bank statistics on overall global poverty rates, DITE.
But the World Bank statistics also show third world developing nations have not benefited substantially from having their markets opened up to the wealthy nations.
[I don't consider Eastern Europe or much of South America as 3rd world.]
I'm saying the overall global statistic has limited usefulness in solving the world's poverty problems.
For example, resource rich third world nations have some of the worst poverty on the planet.
For the unfortunate members of the human race who happen to live in these areas, 'free trade' is a cruel hoax.
Their resources and wealth are being virtually stolen with the collusion of corrupt dictators.
Yet they suffer in poverty, war and hunger.
I think the only way this can be corrected is through common sense trade policy that protects these fragile economies.
But free trade purists who demand completely open markets won't be satisfied with anything less.
So the looting continues relentlessly.
The global statistic also doesn't show the gap between rich and poor opening up in those nations that have benefited the most from free trade policies, like China and India, which still have severe rural and increased urban poverty.
Free trade is a cruel hoax for these unfortunates as well.
Poorly crafted free trade policies have cost America the better part of our industrial base, thrown skilled workers into poverty and turned us into a 'service economy' now being rapidly outsourced into cheap labor regions of the world.
Our trade deficit is allowing foreign investors to buy up America's infrastructure, resources and prime real estate.
America ends up as an unfortunate victim of purist free trade policy.
I believe this is a national security issue.
And let's don't forget that any reduction in the World Bank statistic on overall global poverty
has been achieved at an alarming expenditure of the planet's non-renewable resources and severe degradation of the health of the planet.
This is a planetary security issue.
And this is where I'm more conservative than you are, DITE.
Posted by: justintime | May 20, 2008 9:22 PM
...
And this:
To return to the subject of poverty, I just watched a panel of economic experts explain how the Bush administration, led by Henry Paulson, Secretary of the Treasury, actually engineered the devaluation of our American dollar.
It has lost about 40% of its value over the last several years.
The reason they did this was to staunch the bleeding of wealth from America due to our trade deficit and also to facilitate paying off our enormous foreign debt with devalued dollars.
They think we will be better able to compete against foreign manufacturers with a devalued dollar. That might work if we still had a strong manufacturing base, but alas, our manufacturing base got outsourced and our skilled workforce is being retrained for the new 'service' industry. But now our service industry jobs are being outsourced to SE Asia.
The rise in the cost of gasoline at the pump and the rise in the cost of food is largely due to the devaluation of our dollar.
Isn't the 'free market' wonderful?
And isn't the Bush administration's management of the American economy simply brilliant?
Posted by: justintime | May 21, 2008 3:48 PM
...
Can we get our resident economist to comment on that last post?
DITE, where are you?
Posted by: justintime | May 21, 2008 3:58 PM
...
I just read your comments now. I am going to enjoy some fresh air for a bit, but it was a well thought out response that deserves a response from me. I'll be back.
Posted by: DITE | May 21, 2008 7:28 PM
...
Behind The Rise In Prices: A Plan To Torpedo The Dollar by Danny Schecter
http://www.huffingtonpost.com/danny-schechter/behind-the-rise-in-prices_b_102330.html
You've been enjoying the fresh air for quite a while, DITE.
Posted by: justintime | May 23, 2008 12:18 AM
Posted by: justintime | July 2, 2008 1:23 PM
Ha. Yeah, sorry about that. My computer crashed and then I moved to Korea. I'm settled, and for better or worse, I'm back! My response to your article about the government conspiracy to depreciate the dollar was...
"Well, first we have a flexible exchange rate so it doesn’t devalue or revalue. It depreciates or appreciates. The reason the dollar is worth less is because we have higher inflation than other countries. This, again, is mainly due to large scale home foreclosures causing a mass depreciation of assets.
But I have no idea how this could possibly be spun as an intentional plan by the Bush administration. First, they don’t have the ability to do so. Second, why would they? Yes it is helping our exports, but it is also hurting our huge abundance of financial capital from around the world. So there would be no gain in foreign competitiveness and a loss for our domestic economy."
As far as globalization goes, I'm not worried about losing our manufacturing base. First, there still are some new factories being built in America. Many of the manufacturing jobs that are leaving the rust belt are being outsourced to more business friendly states.
Economies are benefited by comparative advantage. It allows us to further specialize our economy, and no one would argue that the more specialized an economy, the better. Almost all of our coffee is produced outside the US. You could say that we have "outsourced" our coffee production. This, of course, makes sense for us to do because our climate is not good for growing coffee. So the opportunity cost for growing coffee beans in these countries is lower than ours. The principle is similar with our highly publicized heavy machinery industry, but the difference is the issue is not productivity, but rather efficientiency. Labor Unions, in part, have made the opportunity cost too great for the US to compete against the more efficient (yes, cheaper labor) nations. Our economy has grown tremendously since we have evolved into a technology and service economy. I don't want to turn back.
Posted by: DITE | July 3, 2008 6:02 AM
Here in the midwest US, we are seeing a significant percentage of the corn crop being sold to be turned into ethanol. In order to do this, the starch is "removed" from the corn, and we make a product that costs more in raw BTU's to manufacture than we can recover by burning the produced ethanol in our vehicles. We are, then, burning up our food, to a significant extent, in order to drive.
I know, the protein portion of the corn crop is, in theory, still available for animal feed. But much is being lost in the ethanol-production process.
On another point - - speculators are not causing any food shortage, speculators do not cause shortages. Speculators provide liquidity to a market that would essentially stop working without them. If we ever fail to recognize this, and somehow try to "regulate" speculation, we will learn very quickly that we erred, as prices for the commodity in question will quickly elevate, since no one will bring the commodity to a market where speculators are regulated.
Farmers know this.
Posted by: joekc | July 3, 2008 9:23 AM
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