THE EGYPTIAN TINDERBOX: HOW BANKS AND INVESTORS ARE STARVING THE THIRD WORLD

Underlying the sudden, volatile uprising in Egypt and Tunisia is a growing global crisis sparked by soaring food prices.  But what caused the recent jump in food prices remains a matter of debate . . . . 

“What for a poor man is a crust, for a rich man is a securitized asset class.”
–Futures trader Ann Berg, quoted in the UK Guardian

Underlying the sudden, volatile uprising in Egypt and Tunisia is a growing global crisis sparked by soaring food prices and unemployment. The Associated Press reports that roughly 40 percent of Egyptians struggle along at the World Bank-set poverty level of under $2 per day. Analysts estimate that food price inflation in Egypt is currently at an unsustainable 17 percent yearly. In poorer countries, as much as 60 to 80 percent of people’s incomes go for food, compared to just 10 to 20 percent in industrial countries. An increase of a dollar or so in the cost of a gallon of milk or a loaf of bread for Americans can mean starvation for people in Egypt and other poor countries.

Follow the Money

The cause of the recent jump in global food prices remains a matter of debate. Some analysts blame the Federal Reserve’s “quantitative easing” program (increasing the money supply with credit created with accounting entries), which they warn is sparking hyperinflation. Too much money chasing too few goods is the classic explanation for rising prices.

The problem with that theory is that the global money supply has actually shrunk since 2006, when food prices began their dramatic rise. Virtually all money today is created on the books of banks as “credit” or “debt,” and overall lending has shrunk. This has occurred in an accelerating process of deleveraging (paying down or writing off loans and not making new ones), as the subprime housing market has collapsed and bank capital requirements have been raised. Although it seems counterintuitive, the more debt there is, the more money there is in the system. As debt shrinks, the money supply shrinks in tandem.

That is why government debt today is not actually the bugaboo it is being made out to be by the deficit terrorists. The flipside of debt is credit, and businesses run on it. When credit collapses, trade collapses. When private debt shrinks, public debt must therefore step in to replace it. The “good” credit or debt is the kind used for building infrastructure and other productive capacity, increasing the Gross Domestic Product and wages; and this is the kind governments are in a position to employ. The parasitic forms of credit or debt are the gamblers’ money-making-money schemes, which add nothing to GDP.

Prices have been driven up by too much money chasing too few goods, but the money is chasing only certain selected goods. Food and fuel prices are up, but housing prices are down. The net result is that overall price inflation remains low.

While quantitative easing may not be the culprit, Fed action has driven the rush into commodities. In response to the banking crisis of 2008, the Federal Reserve dropped the Fed funds rate (the rate at which banks borrow from each other) nearly to zero. This has allowed banks and their customers to borrow in the U.S. at very low rates and invest abroad for higher returns, creating a dollar “carry trade.”

Meanwhile, interest rates on federal securities were also driven to very low levels, leaving investors without that safe, stable option for funding their retirements. “Hot money” – investment seeking higher returns – fled from the collapsed housing market into anything but the dollar, which generally meant fleeing into commodities.

New Meaning to the Old Adage “Don’t Play with Your Food”

At one time food was considered a poor speculative investment, because it was too perishable to be stored until market conditions were right for resale. But that changed with the development of ETFs (exchange-traded funds) and other financial innovations.

As first devised, speculation in food futures was fairly innocuous, since when the contract expired, somebody actually had to buy the product at the “spot” or cash price. This forced the fanciful futures price and the more realistic spot price into alignment. But that changed in 1991. In a revealing July 2010 report in Harper’s Magazine titled “The Food Bubble: How Wall Street Starved Millions and Got Away with It,” Frederick Kaufman wrote:

The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment. . . .

Robber barons, gold bugs, and financiers of every stripe had long dreamed of controlling all of something everybody needed or desired, then holding back the supply as demand drove up prices.

As Kaufman explained this financial innovation in a July 16 interview on Democracy Now:

Goldman . . . came up with this idea of the commodity index fund, which really was a way for them to accumulate huge piles of cash for themselves. . . . Instead of a buy-and-sell order, like everybody does in these markets, they just started buying. It’s called “going long.” They started going long on wheat futures. . . . And every time one of these contracts came due, they would do something called “rolling it over” into the next contract. . . . And they kept on buying and buying and buying and buying and accumulating this historically unprecedented pile of long-only wheat futures. And this accumulation created a very odd phenomenon in the market. It’s called a “demand shock.” Usually prices go up because supply is low . . . . In this case, Goldman and the other banks had introduced this completely unnatural and artificial demand to buy wheat, and that then set the price up. . . . [H]ard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel. . . . [T]he irony here is that in 2008, it was the greatest wheat-producing year in world history.

. . . [T]he other outrage . . . is that at the time that Goldman and these other banks are completely messing up the structure of this market, they’ve protected themselves outside the market, through this really almost diabolical idea called “replication” . . . . Let’s say, . . . you want me to invest for you in the wheat market. You give me a hundred bucks . . . . [W]hat I should be doing is putting a hundred bucks in the wheat markets. But I don’t have to do that. All I have to do is put $5 in. . . . And with that $5, I can hold your hundred-dollar position. Well, now I’ve got ninety-five of your dollars. . . . [W]hat Goldman did with hundreds of billions of dollars, and what all these banks did with hundreds of billions of dollars, is they put them in the most conservative investments conceivable. They put it in T-bills. . . . [N]ow that you have hundreds of billions of dollars in T-bills, you can leverage that into trillions of dollars. . . . And then they take that trillion dollars, they give it to their day traders, and they say, “Go at it, guys. Do whatever is most lucrative today.” And so, as billions of people starve, they use that money to make billions of dollars for themselves.

Other researchers have concurred in this explanation of the food crisis. In a July 2010 article called “How Goldman Sachs Gambled on Starving the World’s Poor – And Won,” journalist Johann Hari observed:

Beginning in late 2006, world food prices began rising. A year later, wheat price had gone up 80 percent, maize by 90 percent and rice by 320 percent. Food riots broke out in more than 30 countries, and 200 million people faced malnutrition and starvation. Suddenly, in the spring of 2008, food prices fell to previous levels, as if by magic. Jean Ziegler, the UN Special Rapporteur on the Right to Food, has called this “a silent mass murder”, entirely due to “man-made actions.”

Some economists said the hikes were caused by increased demand by Chinese and Indian middle class population booms and the growing use of corn for ethanol. But according to Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi, demand from those countries actually fell by 3 percent over the period; and the International Grain Council stated that global production of wheat had increased during the price spike.

According to a study by the now-defunct Lehman Brothers, index fund speculation jumped from $13 billion to $260 billion from 2003 to 2008. Not surprisingly, food prices rose in tandem, beginning in 2003. Hedge fund manager Michael Masters estimated that on the regulated exchanges in the U.S., 64 percent of all wheat contracts were held by speculators with no interest whatever in real wheat. They owned it solely in anticipation of price inflation and resale. George Soros said it was “just like secretly hoarding food during a hunger crisis in order to make profits from increasing prices.”

An August 2009 paper by Jayati Ghosh, professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University in New Dehli, compared food staples traded on futures markets with staples that were not. She found that the price of food staples not traded on futures markets, such as millet, cassava and potatoes, rose only a fraction as much as staples subject to speculation, such as wheat.

Nomi Prins, writing in Mother Jones in 2008, also blamed the price hikes on speculation. She observed that agricultural futures and energy futures were being packaged and sold just like CDOs (collateralized debt obligations), but in this case they were called CCOs (collateralized commodity obligations). The higher the price of food, the more CCO investors profited. She warned:

[W]ithout strong regulation of electronic exchanges and the derivatives products that enable speculators to move huge proportions of the futures markets underlying commodities, putting a bit of regulation into the London-based exchanges will not alleviate anything. Unless that’s addressed, this bubble is going to take more than homes with it. It’s going to take lives.

What Can Be Done?

According to Kaufman, the food bubble has now increased the ranks of the world’s hungry by 250 million. On July 21, 2010, President Obama signed a Wall Street reform bill that would close many of the regulatory loopholes allowing big financial institutions to play in agriculture commodity futures markets, but Kaufman says the bill’s solutions are not likely to work. Wall Street innovators can devise new ways to speculate that easily dance around cumbersome, slow-to-pass legislation. Attempts to ban all food speculation are also unlikely to work, he says, since firms can pick up the phone and do their trades through London, or arrange over-the-counter (private) swaps.

As an alternative, Kaufman suggests a worldwide or national grain reserve, so that regulators can bring wheat into the market when needed to stabilize prices. He notes that we actually kept a large grain reserve in the Clinton era, before the mania for deregulation. President Franklin Roosevelt pledged to maintain a large grain reserve in his second Agricultural Adjustment Act in 1938.

Chris Cook, former director of a global energy exchange, maintains:

The only long term solution is to completely re-architect markets. Firstly, cutting out middlemen — which is a process already under way. Secondly, a new settlement between producer and consumer nations — a Bretton Woods II. 

Speculative markets today are driven more by fear, says Cook, than by greed. Investors are looking for something safe that will give them an adequate return, which means something they can live on in retirement. They need these investments because their employers and the government do not provide an adequate safety net.

At one time, federal securities were a safe and adequate investment for retirees. Then federal interest rates plunged, and investors moved into municipal bonds. Now that market too is collapsing, due to threats of bankruptcy among bond issuers. Cities, counties and states floundering from the credit crisis have been denied access to the quantitative easing tools used to bail out the banks — although it was the banks, not local governments, that caused the crisis. See “The Fed Has Spoken: No Bailout for Main Street.”

Meanwhile, pensions are being slashed and social security is under attack. Arguably, along with the grain reserves institutionalized under Franklin Roosevelt, we need an Economic Bill of Rights of the sort he envisioned, one that would guarantee citizens at least a bare minimum standard of living. This could be done through job guarantees when people were able to work and social security when they were not. The program could be funded with government-created credit or government-bank-created credit, and this could be done without causing hyperinflation. To support that contention would take more space than is left here, but the subject has been tackled in my book Web of Debt. In the meantime, the credit needed to get local economies up and running again can be furnished through publicly-owned banks. For more on that possibility, see http://PublicBankingInstitute.org.

 

—————

Niko Kyriakou contributed to this article.  

27 Responses

  1. We definitely need a better system. Something that will equitable distribute the world’s resources to everyone.

    • Zarepheth, you mean we need something like a truly free market, free of interference from investment bankers and speculative bets, where real producers and genuine consumers trade goods at market prices? (Did that ever exist? Perhaps not in my lifetime.)

      I now feel like everything I learned about economics in grade school was wrong. We were taught that prices were governed solely by supply and demand. Nobody told us about the invisible hand in the market. I feel duped…

      • Yeah, I’ve been feely that way for about two years or so — ever since I read Ellen’s book and started researching more aspects of macro-economics!

      • Maybe we should only allow “principles” to participate in the markets. People who actually produce a product or use the product and disallow the brokers, speculators, and “investors” from the markets — especially the commodities markets.

  2. I think a more REALISTIC economic system would ban “fictitious persons” from participating in the affairs of adult humans altogether; and corporations, if ever found to be socially useful, would be regarded as “public utilities”, and regulated as such. Adults don’t gamble their own financial future; only a fool would let a fictitious person gamble their future for them. Kinda insane, ain’t it?

    • Very much so.

    • It wasn’t insane 200+ years ago:

      http://www.reclaimdemocracy.org/corporate_accountability/history_corporations_us.html

      My fear is that it will take much more upheaval before we see meaningful reform in the US. During the Great Recession I saw ordinary people began to talk freely about the issues and there was a glimmer of hope. Now that the economy has improved and many are back to work, it’s getting harder to find people who care.

      Corporations may be amoral but they’re not stupid. They won’t let things get bad enough to threaten their existence.

      • The ACLU should be the poster-child for corporate insanity. Their employees ARE incorporated. “IT” (ACLU – a fictitious person) will not willingly advocate legislation (or the more appropriate Constitutional amendment) that would limit their own political influence.

        The only incorporated entity that the people of the US ever voted into existence was the Republic (and, of course, the several States) we know and love. Allegiance to another incorporated entity, such as political parties, special interest groups, commercial ventures, BANKS, etc) is therefore a conflict of interest in our primary social contract – the Constitution. It is time for the People to re-convene an Art. 5 Constitutional Convention to resolve these competing interests. Now that we know how over-grown corporations can usurp the sovereignty of the Constitutional Republic, it’s doubtful we would ever allow corporations to write their own charters again. Given the well-known propensity of corporations to use the Constitution against us, their revised charters would certainly not give them the legal status of a “person” in any sense. Lesson of the past would probably dictate that a new code of corporate morality be written to substitute for their utter lack of conscience, as we know it. A standardized accounting method would be a good place to start imposing sanity on this mess. There would be other changes, I’m sure, that the People could agree to. But let’s all vote on them changes – they affect us all.

        We should get behind any effort to convene, at the local level, an Art. 5 CC; it’s not nearly as hard as organizing a Revolution. Nor bloody.

        • The only problem with such a convention is that the corporation powers are not stupid and would not stand by, idle, watching their profits go up in smoke. No, they’d send in some lobbyists (possibly disquised) to directly influence the convention. They’d also run TV, radio, print, and internet advertising campaigns to stamp their desires into the minds of the voters before the voters even had a chance to learn the nature of the problem and its solution.

          • Of course corporate management is going to resist any effort to revoke their personhood. They already have, and they’re doing right now. The subject is TABOO on the Corporate Media News; and their internet anti-personhood campaign consists of telling people like me that “Resistance is futile”. …….pretty much what you’re telling me now. Who do you work for?

            • That explains why I haven’t seen or heard much about corporate personhood in the news. It seemed to disappear within a day or two of the supreme court decision granting them 2nd amendment rights.

              Sort of like most monetary and economic reform news just isn’t found in the mainstream media – except for the rare article suggesting a red herring of returning to gold based currency…

              • I think you’re referring to fictitious persons’ First Amendment rights to freedom of religion, speech,
                the press, assembly, and petition. The Second Amendment gives wife-beaters the right to wear short-sleeved shirts and isn’t relevant here.

                But that IS the secret to corporations’ iron-fisted grip on legal personhood: ………….just don’t allow the discussion to EVER take place. I don’t think the Media will ever display interest in Art. 5 because if that were ever to happen, the People would have to find some MORAL JUSTIFICATON behind the existence of fictitious persons in the marketplace.

                Where some could justify the existence of evil bankers or monopolistic industries on Constitutional grounds; NO ONE can justify Constitutional rights for a person that doesn’t exist. To do so would also imply that ROBOTS have Constitutional rights, too. After all, robots can legally write checks and sign mortgages, right?

                Corporations are managed by humans; and those humans will soon have to DECIDE whether they’re better off in the homogenized Orwellian world of Corporatism, or the culturally rich world of Nationalism. We know they’re not dumb; the question is how greedy are they? Can they think beyond their next paycheck to the future their children will inherit?

                I don’t know why but “usury” always seems to take on a religious context. I think usury needs to be re-examined in a civic context for its impact on the monetary systems (we’re just now beginning to understand in a historical context). That’s a lot of “context” to absorb, I know. How about, in view of what Wall Street has done to perfect the art of usury, we re-consider the morality of usury and its effect on Modern Monetary Theory.

                Ancient filosofers may have been on to something after all.

  3. This truth is big medicine.
    Email this article to family and friends.
    Grassroots are our only hope, as our representatives are married to these monsters.

  4. great article!

  5. As usual, Ellen Brown and Niko Kyriakou swam far below the surface of a murky subject and delivered nuggets of information. People tend to forget that segments of our society are hoarding tremendous amounts of money and assets while most are going without.

    Wall Street’s desire to control (create false scarcity) food, water and other essentials also caught my eye. Groups that push for organic food standards, small farms and non-gmo seeds are constantly battling with these heartless hoarders.

  6. […] This post was mentioned on Twitter by Francis Beeson, espialtoday. espialtoday said: THE EGYPTIAN TINDERBOX: HOW BANKS AND INVESTORS ARE STARVING THE THIRD WORLD « WEB OF DEBT BLOG http://t.co/1hYxgfD […]

  7. The only solution is to ban all future trade in commodity markets and set exemplary punishments for hoarders and speculators for artificially limiting the supply of food items. This is the only way – go against the speculators and hoarders with full might.

  8. The inflation of the 70s was the result of monetory policey transfered into the real world of strong unions and high wages – this meant the middle and working class obtained the surplus – I would argue there was little capital formation but that is beside the point.
    Volcker and Greenspan as Fed chairmen engineered a mechanism where monetory inflation bypassed the workers and went straight into the markets enriching monetory capital but not building capital.
    Now someone always creams the surplus – back in the 90s 00s it was the “markets” rather then labour.
    What we have now is a massive monetory inflation chasing vital life giving and life changing goods and services.
    This yield keeps the value of the dollar relatively high despite debasement – therefore it is the reserve quality of the dollar that is the problem.
    If this dollar mechanism stopped chasing yield and entered the physical gold market many of these commodities would come down in value and not up as is generally perceived as Gold is essentially inert.

  9. Again, well done Ellen Brown. Anyone can argue the cause for food prices going up, but noboby, and I mean nobody can present a solid case that the demand for food has gone up dramaticlly in the past few months. ( How could it ? ) The population has not increased an amount to account for the absurd increase in food prices around the world. So what’s the reason ? Well, there are other reasons for this crime against humanity then, “just follow the money”. ( although , I agree that the greed of money is the root of all evil ). Untop of the colassal greed of the Central Banking Cartel, this planet is suffering from disturbing affects of the Earth’s climate changes. The massive fires that destroyed much of Russia’s wheat crop in the summer of 2010. They have not exported wheat this year because of it. China’s southern province’s have been suffering a terrible drought in recent years, along with the USA’s bread basket. Australia’s sugar crop has been 1/2 destroyed from record flood’s and a once in a generation (Cat. 5)Typhoon. It get’s worse, . . . Peak oil . As anyone with reasonable intelligence can tell you, the agricultural business is completely dependent on the availibility of cheap oil, to not only power farm equipment, but to produce pesticides & fertilizers that the nutrient stripped soils require to produce the crop yield that the our population needs to sustain itself. The more I learn of these terrible realities, the more I understand that localization is the only sensible solution for the human race. Localization of food & water , finance , medicine , education , ect. The world is becoming a very large place , & we must all learn to live within our means. The Banking Cartel want the commoners to starve in order to make us more relient on them. These snakes can only be stopped by enough people waking up in time. I’m more then confident that this is taking place everytime I visit this blog(amoung oyhers). The world will never be as it is right now. Cheap oil has peaked & just as the population of our species balloned with the introduction of oil, the decline of that product will be followed by the decline of our species. Will the Common Man be this era’s Dinosaur, or will it be the Elite Banker ? I’m putting all of my silver on the Common Man.

  10. I understand the Govt. regulatory agencies over seeing
    Wall St. and the Banking “industry” are skeleton thin in personal and low on resources. Is this going to be another time for tightening our belts?

  11. […] Underlying the sudden, volatile uprising in Egypt and Tunisia is a growing global crisis sparked by soaring food prices and unemployment. The Associated Press reports that roughly 40 percent of Egyptians struggle along at the World Bank-set poverty level of under $2 per day. Analysts estimate that food price inflation in Egypt is currently at an unsustainable 17 percent yearly. In poorer countries, as much as 60 to 80 percent of people’s incomes go for food, compared to just 10 to 20 percent in industrial countries. An increase of a dollar or so in the cost of a gallon of milk or a loaf of bread for Americans can mean starvation for people in Egypt and other poor countries: Read more […]

  12. Excellent research. Important topic with global importance. I see that it is being posted on a number of on line news site. Great!

    • thanks!

  13. Ellen,

    I am at page 300 in web of debt and going slowly. I love you and have found a lot of answers in your book.

    Please don’t excuse autocratic facist greed for client demand for safe haven. Forgive my candid comment, your busy and I want to get my point across swiftly.

    Regards, David

  14. Great Info….

  15. We’re in Need of big change, in how we live in general, consumerism, capitalism and what’s democracy when the banks are pulling all the strings in the end!! Producer->consumer there can’t be no inbetweens!!
    All the worlds Debt needs to be crushed for defo.
    Also we started relying on cheap inports. and therfor recucing the countries total export or national sales of ther own produce.

    Love what you’re doing!!
    All i can do is spread the WORD
    World Liberation Front lol will be born lol

  16. debt crisis is inevitable in a capitalist system. look at http://wocpage.com and see the explanation, and thankfully, also the solution. only when you know the root cause can you come up with the solution to the problem.
    Also, have a look at the link to “Poverty is Unnecessary” http://www.wocpage.com/blog/

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: