“Fuck the Poor!”

If you rely on the mainstream media to get your news about the world, you’re likely to think that the reason why gas prices are already above $4 a gallon in some areas even before spring this year, is due to the unrest in the Arab world (isn’t it always those backwards brown folk in Bum-fuck Egypt?). Trouble is, while it seems intuitive that OPEC countries in a state of political unrest would cause our gas prices to rise, the real culprit is those same folks that are responsible for much of the misery of our modern world – the elite wealthy. The financial power-brokers who pull the strings for all the puppets in our so-called Democratically elected Government. Wall Street. The likes of Goldman Sachs and JP Morgan.

Blogger Chris Peterson gives us the lowdown in an epic, extensive blog post, regarding Wall Street commodity speculators and how they are making themselves richer while fucking the poor by making food and gas more expensive for the rest of the world:

Why Gas Is So Expensive Today (Hint: It’s Not Libya)

In order to understand how Wall Street financiers are responsible for your pain at the pump, first we need to understand something about commodities trading.

Without needing to dig too deeply into Marx, it is for our purposes sufficient to define a commodity as something that can be bought and sold on a market, as they have been for thousands of years. You farm some wheat. You take it to market. You sell the wheat to someone else. You have traded a commodity.

Except that nowadays it doesn’t work precisely like that.

Peterson goes on to cite the article “The Food Bubble” from Harper’s magazine article (available in .pdf format here) in which the details of how Goldman Sachs and other Wall Street’s financial elite took control of the commodities market via special exemptions to the regulations controlling speculative trading.

He excerpts the most relevant parts to make his case:

In 1991 nearly everything else that could be recast as a financial abstraction had already been considered. Food was pretty much all that was left. And so with accustomed care and precision, Goldman’s analysts went about transforming food into a concept. They selected eighteen commodifiable ingredients and contrived a financial elixir that included cattle, coffee, cocoa, corn, hogs, and a variety or two of wheat. They weighted the investment value of each element, blended and commingled the parts into sums, then reduced what had been a complicated collection of real things into a mathematical formula that could be expressed as a single manifestation, to be known thenceforward as the Goldman Sachs
Commodity Index. Then they began to offer shares.

…

North America, the Saudi Arabia of cereal, sends nearly half its wheat production overseas, and an obscure syndicate known as the Minneapolis Grain Exchange remains the supreme price-setter for the continent’s most widely exported wheat, a high-protein variety called hard red spring. Other varieties of wheat make cake and cookies, but only hard red spring makes bread. Its price informs the cost of virtually every loaf on earth.

As far as most people who eat bread were concerned, the Minneapolis Grain Exchange had done a pretty good job: for more than a century the real price of wheat had steadily declined. Then, in 2005, that price began to rise, along with the prices of rice and corn and soy and oats and cooking oil. Hard red spring had long traded between $3 and $6 per sixty- pound bushel, but for three years Minneapolis wheat broke record after re- cord as its price doubled and then doubled again. No one was surprised when in the first quarter of 2008 trans- national wheat giant Cargill attributed its 86 percent jump in annual profits to commodity trading. And no one was surprised when packaged-food maker ConAgra sold its trading arm to a hedge fund for $2.8 billion. Nor when The Economist announced that the real price of food had reached its highest level since 1845, the year the magazine first calculated the number.

Nothing had changed about the wheat, but something had changed about the wheat market. Since Goldman’s innovation, hundreds of billions of new dollars had overwhelmed the actual supply of and actual demand for wheat, and rumors began to emerge that someone, somewhere, had cornered the market. 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. But there was plenty of real wheat, and American farmers were delivering it as fast as they always had, if not even a bit faster. It was as if the price itself had begun to generate its own demand—the more hard red spring cost, the more investors wanted to pay for it.

…

The global speculative frenzy sparked riots in more than thirty countries and drove the number of the world’s “food insecure” to more than a billion. In 2008, for the first time since such statistics have been kept, the proportion of the world’s population without enough to eat ratcheted upward. The ranks of the hungry had increased by 250 million in a single year, the most abysmal increase in all of human history.

Note: giant, multi-national, Federally subsidized agricultural corporations post record profits while the starving masses of the third world riot.

Fuck the poor, indeed.

So how were the speculators of commodity markets the cause of the food riots in 2008…and the current unrest and rapidly rising food and gas prices in the present? We must first understand how the speculative commodities markets were initially designed for, and how regulations once kept the current profiteering we are now seeing:

After the combined credit crunch, real estate wreck, and stock-market meltdown now known as the Panic of 1857, U.S. grain merchants conceived a new stabilizing force: In return for a cash commitment today, farmers would sign a forward contract to deliver grain a few months down the line, on the expiration date of the contract. Since buyers could never be certain what the price of wheat would be on the date of delivery, the price of a future bushel of wheat was usually a few cents less than that of a present bushel of wheat. And while farmers had to accept less for future wheat than for real and present wheat, the guaranteed future sale protected them from plummeting prices and enabled them to use the promised payment as, say, collateral for a bank loan. These contracts let both producers and consumers hedge their risks, and in so doing reduced volatility.

The exchanges soon attracted a new species of merchant interested in numbers, not grain. This was the speculator. As the price of futures contracts fluctuated in daily trading, the speculator sought to cash in through strategic buying and selling. And since the speculator had neither real wheat to sell nor a place to store any he might purchase, for every “long” position he took (a promise to buy future wheat), he would eventually need to place an equal and opposite “short” position (a promise to sell). Farmers and millers welcomed the speculator to their market, for his perpetual stream of buy and sell orders gave them the freedom to sell and buy their actual wheat just as they pleased.

Under the new system, farmers and millers could hedge, speculators could speculate, the market remained liquid, and yet the speculative futures price could never move too far from the “spot” (or actual) price: every ten weeks or so, when the delivery date of the contract approached, the two prices would converge, as everyone who had not cleared his position with an equal and opposite position would be obligated to do just that. The virtuality of wheat futures would settle up with the reality of cash wheat, and then, as the contract expired, the price of an ideal bushel would be “discovered” by hedger and speculator alike.

…

And despite the occasional market collapse (onions in 1957, Maine potatoes in 1976), for more than a century the basic strategy and tactics of futures trading remained the same, the price of wheat remained stable, and increasing numbers of people had plenty to eat.

The decline of volatility, good news for the rest of us, drove bankers up the wall. Clearly, some innovation was in order. In the midst of this dead market, Goldman Sachs envisioned a new form of commodities investment, a product for investors who had no taste for the complexities of corn or soy or wheat, no interest in weather and weevils, and no desire for getting into and out of shorts and longs – investors who wanted nothing more than to park a great deal of money somewhere, then sit back and watch that pile grow. The managers of this new product would acquire and hold long positions, and nothing but long positions, on a range of commodities futures. They would not hedge their futures with the actual sale or purchase of real wheat (like a bona-fide hedger), nor would they cover their positions by buying low and selling high (in the grand old fashion of commodities speculators). In fact, the structure of commodity index funds ran counter to our normal understanding of economic theory, requiring that index-fund managers not buy low and sell high but buy at any price and keep buying at any price. No matter what lofty highs long wheat futures might attain, the managers would transfer their long positions into the next long futures contract, due to expire a few months later, and repeat the roll when that contract, in turn, was about to expire — thus accumulating an everlasting, ever-growing long position, unremittingly regenerated.

“You’ve got to be out of your freaking mind to be long only,” Rothbart said. “Commodities are the riskiest things in the world.”

But Goldman had its own way to offset the risks of commodities trading—if not for their clients, then at least for themselves. The strategy, standard practice for most index funds, relied on “replication,” which meant that for every dollar a client invested in the index fund, Goldman would buy a dollar’s worth of the un- derlying commodities futures (minus management fees). Of course, in order to purchase commodities futures,the bankers had only to make a “good-faith deposit” of something like 5 percent. Which meant that they could stash the other 95 percent of their investors’ money in a pool of Treasury bills, or some other equally innocuous financial cranny, which they could subsequently leverage into ever greater amounts of capital to utilize to their own ends, whatever they might be. If the price of wheat went up, Goldman made money. And if the price of wheat fell, Goldman still made money — not only from management fees, but from the profits the bank pulled down by investing 95 percent of its clients’ money in less risky ventures. Goldman even made money from the roll into each new long contract, every instance of which required clients to pay a new set of transaction costs.

The bankers had figured out how to extract profit from the commodities market without taking on any of the risks they themselves had introduced by flooding that same market with long orders. Unlike the wheat producers and the wheat speculators, or even Goldman’s own customers, Goldman had no vested interest in a stable commodities market. As one index trader told me, “Commodity funds have historically made money — and kept most of it for themselves.”

So how was Goldman and Sachs able to pull this off? The same way everything else is done in the grand old USA Inc. You get your stooges appointed to Government regulatory agencies who than grant you exemptions, thereby giving you cartel power to gain market advantage, screw your competitors, and yes, fuck the poor.

Government regulators, far from preventing this strange new way of accumulating futures, actively encouraged it. Congress had in 1936 created a commission that curbed “excessive speculation” by limiting large holdings of futures contracts to bona-fide hedgers. Years later, the modern-day Commodity Futures Trading Commission continued to set absolute limits on the amount of wheat-futures contracts that could be held by speculators. In 1991, that limit was 5,000 contracts. But after the invention of the commodity index fund, bankers convinced the commission that they, too, were bona-fide hedgers.

Gee, anyone care to guess how they went about “convincing” the commission?

As a result, the commission issued a position-limit exemption to six commodity index traders, and within a decade those funds would be permitted to hold as many as 130,000 wheat-futures contracts at any one time.

That’s alot of speculatin’ exempt from position-limits…

The wheat harvest of 2008 turned out to be the most bountiful the world had ever seen, so plentiful that even as hundreds of millions slowly starved, 200 million bushels were sold for animal feed. Livestock owners could afford the wheat; poor people could not. Rather belatedly, real wheat had shown up again—and lots of it. U.S. Department of Agri- culture statistics eventually revealed that 657 million bushels of 2008 wheat remained in U.S. silos after the buying season, a record-breaking “carryover.”

This highlights the idea that simple supply and demand was not behind the so-called shortages of food in 2008…or now.

To bolster the point, Peterson than quotes a more detailed explanation from Matt Taibbi’s book, Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America:

All the way back in 1936, after gamblers disguised as Wall Street brokers destroyed the American economy, the government of Franklin D. Roosevelt passed a law called the Commodity Exchange Act that was specifically designed to prevent speculators from screwing around with the prices of day-to-day life necessities like wheat and corn and soybeans and oil and gas.

Let’s say you’re that cereal company and your business plan for the next year depends on your being able to buy corn at a maximum of $3.00 a bushel. And maybe corn right now is selling at $2.90 a bushel, but you want to insulate yourself against the risk that prices might skyrocket in the next year. So you buy a bunch of futures contracts for corn that give you the right—say, six months from now, or a year from now—to buy corn at $3.00 a bushel.

Now, if corn prices go up, if there’s a terrible drought and corn becomes scarce and ridiculously expensive, you could give a damn, because you can buy at $3.00 no matter what. That’s the proper use of the commodities futures market.

It works in reverse, too—maybe you grow corn, and maybe you’re worried about a glut the following year that might, say, drive the price of corn down to $2.50 or below. So you sell futures for a year from now at $2.90 or $3.00, locking in your sale price for the next year. If that drought happens and the price of corn skyrockets, you might lose out, but at least you can plan for the future based on a reasonable price.

These buyers and sellers of real stuff are the physical hedgers. The FDR administration recognized, however, that in order for the market to properly function, there needed to exist another kind of player—the speculator. The entire purpose of the speculator, as originally envisioned by the people who designed this market, was to guarantee that the physical hedgers, the real
players, could always have a place to buy and/or sell their products.

Again, imagine you’re that corn grower but you bring your crop to market at a moment when the cereal company isn’t buying. That’s where the speculator comes in. He buys up your corn and hangs on to it. Maybe a little later, that cereal company comes to the market looking for corn—but there are no corn growers selling anything at that moment. Without the speculator there, both grower and cereal company would be fucked in the instance of a temporary disruption.

With the speculator, however, everything runs smoothly. The corn grower goes to the market with his corn, maybe there are no cereal companies buying, but the speculator takes his crop at $2.80 a bushel. Ten weeks later, the cereal guy needs corn, but no growers are there—so he buys from the speculator, at $3.00 a bushel. The speculator makes money, the grower unloads his crop, the cereal company gets its commodities at a decent price, everyone’s happy.

This system functioned more or less perfectly for about fifty years. It was tightly regulated by the government, which recognized that the influence of speculators had to be watched carefully. If speculators were allowed to buy up the whole corn crop, or even a big percentage of it, for instance, they could easily manipulate the price. So the government set up position limits, which guaranteed that at any given moment, the trading on the commodities markets would be dominated by the physical hedgers, with the speculators playing a purely functional role in the margins to keep things running smoothly.

Of course. Things lasted long enough for the big players to gain their position of influence to gain those exceptions, manipulate the prices and reap the profits.

in 1991, J. Aron—the Goldman subsidiary—wrote to the Commodity Futures Trading Commission (the government agency overseeing this market) and asked for one measly exception to the rules.

The whole definition of physical hedgers was needlessly restrictive, J. Aron argued. Sure, a corn farmer who bought futures contracts to hedge the risk of a glut in corn prices had a legitimate reason to be hedging his bets. After all, being a farmer was risky! Anything could happen to a farmer, what with nature being involved and all!

Everyone who grew any kind of crop was taking a risk, and it was only right and natural that the government should allow these good people to buy futures contracts to offset that risk.

But what about people on Wall Street? Were not they, too, like farmers, in the sense that they were taking a risk, exposing themselves to the whims of economic nature? After all, a speculator who bought up corn also had risk—investment risk. So, Goldman’s subsidiary argued, why not allow the poor speculator to escape those cruel position limits and be allowed to make transactions in unlimited amounts? Why even call him a speculator at all? Couldn’t J. Aron call itself a physical hedger too? After all, it was taking real risk—just like a farmer!

On October 18, 1991, the CFTC-in the person of Laurie Ferber, an appointee of the first President Bush—agreed with J. Aron’s letter. Ferber wrote that she understood that Aron was asking that its speculative activity be recognized as “bona fide hedging”—and, after a lot of jargon and legalese, she accepted that argument. This was the beginning of the end for position limits and for the proper balance between physical hedgers and speculators in the energy markets.

In the years that followed, the CFTC would quietly issue sixteen similar letters to other companies. Now speculators were free to take over the commodities market. By 2008, fully 80 percent of the activity on the commodity exchanges was speculative, according to one congressional staffer who studied the numbers—”and that’s being conservative,” he said.

Pay no attention to the people behind the curtain, pulling the levers! It’s those fanatical brown people rioting against their authoritarian governments that’s causing these crazy prices!

Now you may ask yourself, what does the price of wheat from Minnesota have to do with the price of gas in Maine or California? Answer: the same mechanism that allowed speculators to take over the wheat market, allowed them to do the same with oil.

Quoting from Taibbi again:

One thing we know for sure is that the price increases had nothing to do with supply or demand. In fact, oil supply was at an all-time high, and demand was actually falling. In April 2008 the secretary-general of OPEC, a Libyan named Abdalla El-Badri, said flatly that “oil supply to the market is enough and high oil prices are not due to a shortage of crude.” The U.S. Energy Information Administration (EIA) agreed: its data showed that worldwide oil supply rose from 85.3 million barrels a day to 85.6 million from the first quarter to the second that year, and that world oil demand dropped from 86.4 million barrels a day to 85.2 million.

Not only that, but people in the business who understood these things knew that the supply of oil worldwide was about to increase. Two new oil fields in Saudi Arabia and another in Brazil were about to start dumping hundreds of thousands more barrels of oil per day into the market. Fadel Gheit, an analyst for Oppenheimer who has testified before Congress on the issue, says that he spoke personally with the secretary-general of OPEC back in 2005, who insisted that oil prices had to be higher for a very simple reason—increased security costs.

“He said to me, if you think that all these disruptions in Iraq and in the region… look, we haven’t had a single tanker attacked, and there are hundreds of them sailing out every day. That costs money, he said. A lot of money.”
So therefore, Gheit says, OPEC felt justified in raising the price of oil. To 45 dollars a barrell At the height of the commodities boom, oil was trading for three times that amount.

“I mean, oil shouldn’t have been at sixty dollars, let alone a hundred and forty-nine,” Gheit says.

This was why there were no lines at the gas stations, no visible evidence of shortages. Despite what we were being told by both Barack Obama and John McCain, there was no actual lack of gasoline. There was nothing wrong with the oil supply.

All of these factors contributed to what would become a historic spike in gas prices in the summer of 2008. The press, when it bothered to cover the story at all, invariably attributed it to a smorgasbord of normal economic factors. The two most common culprits cited were the shaky dollar (investors nervous about keeping their holdings in U.S. dollars were, according to some, more likely to want to shift their holdings into commodities) and the increased worldwide demand for oil caused by the booming Chinese economy.

Both of these factors were real. But neither was any more significant than the massive inflow of speculative cash into the market.

The U.S. Department of Energy’s own statistics prove this to be the case. It was true, yes, that China was consuming more and more oil every year. The statistics show the Chinese appetite for oil did in fact increase over time:

If you add up the total increase between each of those years, i.e., the total increase in Chinese oil consumption over the five and a half years between the start of 2003 and the middle of 2008, it turns out to be just under a billion Barrels — 992,261,824 to be exact.

During the same time period, however, the increase in index speculator cash pouring into the commodities markets for petroleum products was almost exactly the same—speculators bought 918,966,932 barrels, according to the CFTC.

Oil shot up like a rocket, hitting an incredible high of $149 a barrel in July 2008, taking with it prices of all the other commodities on the various indices. Food prices soared along with energy prices. According to some estimates by international relief agencies—estimates that did not blame commodity speculation for the problem, incidentally—some 100 million people joined the ranks of the hungry that summer worldwide, because of rising food prices.

Then it all went bust, as it had to, eventually. The bubble burst and oil prices plummeted along with the prices of other commodities. By December, oil was trading at $33.

And then the process started all over again.

Peterson re-capped this rather long, detailed exposition on how speculative trading has resulted in our current reality of rising food and energy prices:

So, to briefly recap what we’ve learned thus far:

- buyers and sellers trade commodities on markets

- speculators help provide liquidity, by buying when sellers wish to sell but no
one wishes to buy, and selling when buyers wish to buy but no one wishes to sell

- however, the biggest banks got exemptions from the government to purchase huge positions on commodities

- instead of selling these positions to buyers, these banks hang on to them, because their investors are all “long”, meaning they think the price is going to go up; at the end of every month, they just “roll over” their positions, and keep on holding the things they were supposed to have sold

- because none of the banks sell what they hold, the price goes up; because the price goes up, more people make money on their positions; because they make more money on their positions they buy more stuff and don’t sell what they hold; and on and on forever

Are we seeing evidence of this today?

Yes.

Remember how Libya is being blamed for diminishing the world’s oil supply with its 1.5 million barrels per day of output?

Well, speculators own contracts on 269 million barrels of oil – equivalent to almost a third of the United States National Emergency Reserve – so much so, in fact, JP Morgan is renting supertankers to store their excess reserves offshore because they’ve simply run out of space on land.

Peterson than wraps this rather illuminating post:

The current spike in gas prices is not primarily a result of anything to do with the freedom fighters in the Arab world. Nor is it a result of OPEC’s production levels, which would suggest a far lower $/gallon than can be found on the open market.

Rather, the spikes are primarily a result of the speculative market on oil. This speculative market is driven by the practices of the biggest banks, who have special exemptions to treat commodities like a casino, who have zero incentive to appropriately hedge their bets, who do not provide the liquidity they were designed to provide, and who generally provide nothing of value to society except to push prices of things higher and higher so that very rich people will continue to invest with them.

The rich get richer, through control of the apparatus of the Government’s regulatory agencies, impoverishing the rest of us in the first world, and literally starving the denizens in the third-world.

It’s as if meetings in the boardroom of the likes of Goldman and Sachs and JP Morgan and their ilk really do resemble the Roman Senate depicted in the Mel Brooks classic.

“All fellow members of the position-limited-exempt commodity speculator firms…hear me! Shall we continue to hoard food and oil to drive up the prices to create even more profits for the rich? Or shall we aspire to a more noble purpose and help provide affordable food and energy to the poor? ”

We know their answer.