Graph shows food prices rising before Fed money creation... can someone explain this?

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Neros Lyre replied on Thu, May 5 2011 1:11 AM

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Suggested by Anton

Wrong, wrong, and even more wrong.  It has nothing to do with ethanol prices or rising demand as much as a speculative bubble purposefully orchestrated by Goldman-Sachs (via their Commodity Index) and their bedfellows.  

For a better picture read The Food Bubble in Harper's Magazine: http://www.harpers.org/archive/2010/07/0083022

As a very short picture of what's going on:

The biggest banks got exemptions from the U.S. Government to have MASSIVE speculative positions (of which they only need to put down 5% in good faith and the rest can be leveraged into safer investment vehicles, e.g. T-bills).  Instead of selling these positions to buyers, the banks hold on to them because their investors are long.  Every month, the long position is rolled-over to another long position (but the banks hold onto what they were supposed to sell).  Because the banks aren't selling their positions, the price goes up.  The price goes up and the investors make money on their positions.  Because they make more money on their positions, they buy even more stuff and again, don't sell what they hold.  They repeat until the bubble bursts (as it did with oil 2-3 years ago) and then it starts all over again from the bottom.

And what are they doing with the unused products?  JPMorgan currently has 270 million barrels of oil in reserve (equivalent to about 1/3 of the U.S. strategic reserve) and is now buying supertankers because they've run out of places on land to store their oil.  http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aZtS4TC9mxJM

At present, worldwide production exceeds what it was 7 years ago.  But what about demand, supply is only half the issue you might claim.  Yeah well, worldwide demand is actually down (surprise: unemployed people don't drive to work).  So no, the change in prices have relatively little to do with freedom movements in the Arab world, OPEC production, but everything to do with the practices of the biggest banks who have no incentive to hedge bets and are not providing the liquidity they are supposed to.  But hey, it's totally cool if millions of people starve in Africa, Asia, and Central America or if you have trouble making ends meet because food prices are at historic highs, rich people need a place to invest their money and a government to enable the process at the expense of the rest of us.  

 In sum, while we often advocate the removal of government interventions and regulations in the market, sometimes those regulations help the vast majority of humanity at the expense of a very small and priveleged few.  

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Neros Lyre replied on Thu, May 5 2011 10:43 AM

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Are you asking where investment banks get money from?  It's money their customers invests with them.  They're not leveraging their own money, they're leveraging they're customers money.  They make their money from a combination of the steady rate of interest on the safer vehicles and the small service charge they hit their customers with everytime the position renews.  They're own money is in no way tied up in these funds (going long only is incredibly stupid).  Let's go with an example: 

To look at this another way—just to make it easy—let's create something we call the McDonaldland Menu Index (MMI). The MMI is based upon the price of eleven McDonald's products, including the Big Mac, the Quarter Pounder, the shake, fries, and hash browns. Let's say the total price of those eleven products on November l, 2010, is $37.90. Now let's say you bet $1,000 on the McDonaldland Menu Index on that date, November 1. A month later, the total price of those eleven products is now $39.72.

Well, gosh, that's a 4.8 percent price increase. Since you put $1,000 into the MMI on November 1, on December 1 you've now got $1,048. A smart investment!  Just to be clear—you didn't actually buy $1,000 worth of Big Macs and fries and shakes. All you did is bet $1,000 on the prices of Big Macs and fries and shakes.

But here's the thing: if you were just some schmuck on the street and you wanted to gamble on this nonsense, you couldn't do it, because your behavior would be speculative and restricted under that old 1936 Commodity Exchange Act, which supposedly maintained that delicate balance between speculator and physical hedger (i.e., the real producers/consumers). Same goes for a giant pension fund or a trust that didn't have one of those magic letters. Even if you wanted into this craziness, you couldn't get in, because it was barred to the Common Speculator. The only way for you to get to the gaming table was, in essence, to rent the speculator-hedger exemption that the government had quietly given to companies like Goldman Sachs via those sixteen letters.