I ran across this article yesterday (and posted it in the Ron Paul thread) but thinking about it I decided it needs it's own thread.
For a couple of years it's been plain to me that investors moved from tanking real estate to commodities inducing the big runups in '07 and '08 in everything from food to metals - and oil. This guy puts the story together well (sorry for the long snip but the story is worth a read):Johann Hari: How Goldman gambled on starvation
It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions."
For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he'll lose some cash, but if there's a lousy summer or the global price collapses, he'll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.
Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born.
Here's how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world's frightened investors stampeded on to this ground.
So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.
We all knew, thanks to Enron, that deregulated energy markets can be manipulated to the detriment of consumers and now we know gambling on derivatives can stampeded investors. But the thing that I started thinking about this morning was in fact a thread JD wrote years ago on how price signals will create fuel substitution.
When you look at a plot of inflation adjusted oil prices like this from forecastcharts.com however, it becomes obvious that since deregulation in the '90s and the surge in derivatives based on energy, there is no clear price signal to allow innovators the confidence to explore alternative fuels and systems:
I read "The Quants" recently, a book about the math geek/derivative-inventing Wall Streeters who wrote software to take advantage of the inherent fluctuations in market prices - and who in borrowing huge amounts to place their bets, precipitated a large portion of the damage of the '07 crash. I'm not smart enough to know if the bill grinding through congress will put any meaningful limits to the gambling pits of the Mercantile exchange but it sure seems like it should.
So my question is, how are the innovators to have the confidence to innovate with a price signal full of noise from profiteers?
.HEY AMERICA, WELCOME TO THE RESULTS OF DEREGULATION Who let the oil market be manipulated?