How Wall Street Greed Fueled Egypt's Turmoil
Many reasons have been cited for the runaway food costs that have plagued Egypt's citizens: increased global demand, floods and drought in grain-producing nations, reduced supplies because of biofuel production, Federal Reserve policies. But it's becoming clear that our own dirty little secret -- risky financial derivatives, like those that spurred the U.S. mortgage crisis -- have bubbled up from the toxic Wall Street pavement as a major cause. We need to dig deeper into the dirt.
The richest 1% of Americans, unlike lower-income earners who spend mostly on consumer goods, can spend much of their annual trillion dollar windfall from tax cuts and deregulation on high-stakes investment opportunities. And this they have done, with great success and little regard to the global consequences.
One of their strategies is the "long-only" commodities index fund, by which speculators keep buying even when a rising market would normally motivate them to sell. This can put massive inflationary pressure on a commodity. According to 25-year trading veteran Daniel Dicker, these investment vehicles, which didn't even exist a few years ago, have caused such a market imbalance that it's nearly impossible to avoid a bubble in food prices.
Dicker remarks about the importance to financial traders to "capitalize on the supply shortages," and about the need by governments to stockpile basic commodities to prevent food emergencies. He also notes the speed with which these trades occur. Apparently it all happens too fast for a humanitarian response.
As a result, according to the New York Times, wheat has reached its highest price in 28 years, and the effects are being felt in Egypt and Haiti and other countries whose citizens live on a few dollars a day. Harper's Magazine editor Frederick Kaufman notes that Egypt's inflation rate on food has reached 17% PER MONTH.
The financial players, says Kaufman, are investing in "imaginary wheat." In 2008 the publication Price Perceptions said, "index funds alone now own about 1 billion bushels of Chicago wheat compared to annual US production of about 500 million." 'Fantasy finance,' as Les Leopold calls it.
Not surprisingly, unregulated free market defenders deny all this. The Economist says, "there is little empirical evidence that investors cause more than fleeting distortions to commodity prices." Resource Investor claimed in 2008 that while "commodity market speculation by long-only index funds has increased markedly...most commodity futures markets experienced an equally dramatic or even greater increase in selling by commercial hedgers."
But Frederick Kaufman counters that "speculators are outnumbering the physical hedgers by about 4 to 1 in these markets." Revenues from speculative trading at Goldman Sachs alone more than quintupled over the past two years. Way back in 2007 a Market Club Trader's Blog commented that "As money has flooded into this (Goldman Sachs Commodity Index), prices have continued higher."
In his February 4, 2011 Common Dreams essay "Food, Egypt and Wall Street," Institute for Policy Studies writer Robert Alvarez cited one of the main reasons for this sordid financial state of affairs, the Commodity Futures Modernization Act of 2000: "Before this law, the Commodity Futures Trading Commission (CFTC) served as a cop on the beat, enforcing rules that prevent distortion of manipulation of prices beyond normal supply and demand. But Wall Street Banks and companies such as ENRON, and British Petroleum were determined to make a lot more money from speculation by exempting energy-derivative contracts and related swaps from government oversight."
Alvarez quotes noted hedge trader Michael McMasters: "This amounts to 'a form of electronic hoarding and greatly increases the inflationary effect of the market. It literally means starvation for millions of the world's poor.'"
We're letting a few thousand well-positioned financial experts fashion games of chance that earn them billions with other people's money. And, now, with other people's lives.