Tuesday, October 12, 2010

Where's The Wheat?

All over the world food prices are rising causing riots and starvation. The weather is certainly partly responsible, but that is not the real story. It used to be that the rule in commodities was simple, Supply and Demand. Another way to look at this is the stock to consumption ratio. That ratio is not really very high right now. There is enough food and it is getting from where it is grown to where it is eaten, so what gives?

Does it seem to be a recurring theme that wherever the majority of people are suffering, a small part of the population is getting stinking rich from that pain? At a very simple level what is happening right now is that those people that made a fortune in mortgages and then begged for a bailout are now buying up all the food and oil. After all, we all have to eat and these days that also means we all need food shipped to us. So by holding part of the food and part of the oil out of circulation, the price goes up for you and I. It's like there's a millionaire welfare tax on everything.

You might think that these people holding all this up must be spending a fortune on storage costs and losing money on food spoiling. Not really. Food and oil are necessities in the modern world. If the price of food goes up, consumers will pay. If consumers can't pay then governments will subsidize. Speculators know that when it comes time to schedule a ship or a train, the owners will pay any price for the futures. Those owners know they can sell the high priced wheat to the distributor who knows he can pass it on to the stores who pass it on to the customer. The kind of food eaten will change, but not the total calories. (no wheat was harmed in the making of this explanation)

They have also packed these futures into securities that speculators can then buy insurance on. Is this starting to sound familiar? It should, it's the housing market all over again.

Now for the REALLY scary part. There is more money in the world than everything in the world is worth. And, speculators can make more whenever they want. So in theory, speculators can buy everything, wait until our last breath and charge us every penny we have. At that point we are of no value to them and we die. That theory might seem a little harsh and unlikely unless you are a poor family in Bangladesh starving to death because you can't afford the price of food doubling. Then that theoretical life becomes your true reality.

How can this happen? In 2000, at the end of Clinton's presidency, he passed a whole lot of deregulation laws that led to the housing crises we have now. These also deregulated commodities and a whole lot of other things. And who can we thank for this deregulation? The same people who invented many of these new financial instruments, The Koch Brothers!

Yeah, but how does it work? OK, first we have the whole food spoiling thing and the storage. What if what you own is not a pile of wheat, but instead a certificate saying that some wheat is yours somewhere. As long as the wheat keeps moving, but a pile is reserved for you then that wheat will keep getting freshened up with new coming in and old going out. So it is with futures. As the wheat is about to be delivered you sell it and buy another future. Since the original futures traders, the farmers, shippers, and retailers still need the system you will always find a buyer. If the farmers decide to grow more food than is needed and the retailers have a decrease in demand the speculators dump everything and move to another bubble. They lose money, but nothing compared to what they made. The commodities market now has no idea what the real price is or the real supply and demand. It is in chaos and people die.

But this brings up the biggest question. Why do we let this happen? We've conflated capitalism with democracy. All this ranting and raving about "Free Markets" makes us think that our democratic freedom is in danger if we regulate markets. But this is stupid! We have a democracy and yet we have laws. Having laws that reflect our values as a people is what democracies are all about. Pure freedom is called Anarchy. Once we see that we function best when we agree to laws that benefit the majority over the powerful, we return to traditional democracy and the great economic gains that brought us.

No comments:

Post a Comment