The Egyptian Tinderbox

How Banks and Investors are Starving the Third World

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 counter-intuitive, 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.

Ellen Brown is an attorney in Los Angeles and the author of 11 books. In Web of Debt: The Shocking Truth about Our Money System and How We Can Break Free, she shows how a private banking cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Read other articles by Ellen, or visit Ellen's website.

11 comments on this article so far ...

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  1. Don Hawkins said on February 5th, 2011 at 12:48pm #

    Thank’s Ellen as on CNBC yesterday some talk about food inflation and why this is happening in Egypt as usual the Sun was shinning and the birds were chirping of course Wall Street has nothing to do with it. Thank’s for witting this Ellen as for me it’s sometimes hard to think backwards using one and one is twenty seven I wonder at Harvard Business School what is that class called fuzzy math 101 or is that learned on the job?

  2. Don Hawkins said on February 5th, 2011 at 2:53pm #

    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.” Ellen

    Let’s see remember this a few years back.

    by Doug Heller

    “Burn, baby, burn,” is what one Enron electricity trader gleefully said about a California wildfire during the energy deregulation crisis. The fires, which knocked down power lines, helped push electricity prices higher. But that was one of the tamer comments found by CBS news among tapes in which Enron employees talk about shutting down power plants to steal “money from California to the tune of about a million [dollars a day],” and selling electricity to “grandma Millie… for f—–g $250 a megawatt hour.” The tapes also show that Enron’s head honchos, Ken Lay and Jeff Skilling were in the loop on the schemes to rob California blind. (Even with these revelations, the feds have not ordered the billions of dollars in refunds that Californians are due.)

    So in while pursuing their institutional role: maximizing short-term profit and putting aside externalities corporate America Wall Street just maybe at Harvard Business School they offer a class on the basics how to sell your soul to the system the last time I checked called Capitalism and become wealthy beyond your wildest dreams. Those day’s are probably over well no probably about it and just maybe why we see so much maximizing short-term profit and putting aside externalities in the first part of the twenty first century.

  3. Deadbeat said on February 5th, 2011 at 5:20pm #

    Ms. Brown does a fine job detailing the complexity and inner workings of the monetary system but unfortunately her commentary is really nothing more than a chronicle of the monetary system that will only continue operating in this same fashion until we as a class decide and struggle to get rid of the monetary system entirely. So long as Capitalism and markets exist so will the problems Ms. Brown chronicles. In other words Ms. Brown doesn’t get to the root of a solution.

    Reading further Ms. Brown does offer this suggestion …

    Although it seems counter-intuitive, 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.

    Let’s analyze these comments:
    [1] If there was no money there would be no debt and no need for credit.

    [2] Ms. Brown is incorrect in her assumption that “good” credit raises the GDP while “bad” credit adds nothing to GDP. That is incorrect. The GDP is merely a measure of economic activity and is entirely amoral.

    [3] Ms. Brown also ASSUMES that government deficit spending will raise incomes. This claim has been promulgate by the Liberals and pseudo-Left. The government has been consistently running deficits for decades while incomes have been stagnant. Therefore the two do not correlate.

    [4] Also even if the government spend money on infrastructure those jobs again may or may not yield overall income growth. The biggest winners will be owner/contractors and with unions in the dumps the bargaining power of workers is just not present.

    [5] I agree with Ms. Brown’s explanation of raising food prices but again this is how Capitalism function by making a commodity out of everything thus food is a commodity. Get rid of money and you get rid of the buying and selling of vital needs and hording.

    Essentially Ms. Brown is making a plea for the restoration of Keynesian measures but we’ve seen the results of Keynesian economics. It fails to address the very fundamental structures of Capitalist production and fails to eliminate the power of the Capitalist class. This is why Ms. Brown will be writing about these issue in perpetuity.

    Ms. Brown writes …

    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.

    Again like many on the pseudo-Left and across the political spectrum for the possible exception of the Right, mentioning Zionism is strictly taboo. Ms. Brown attempts to shift the primary focus to the impoverishment to the banks rather than to analyze RACISM. It appears ever since the 1980’s Whites across the political spectrum want to pretend that racism no longer exist but it does. For the past 30 years the retardation of Arab aspirations supported by the U.S. was in order to help Zionism achieve Middle East hegemony. The economic impoverishment is the result of RACISM and its brutality rather than Capitalism.

    The proper analysis is to examine BOTH Capitalism and Racism rather than what we get here which is to look only at the former and to ignore the latter.

    What is happening in Egypt especially is a National Liberation Movement whereby ALL Egyptians ACROSS conflicting class lines are in a struggle to expunge Zionist tyranny. Throwing out Zionism and Western imperialism will permit Egypt to develop her economy under her own terms of self-determination.

  4. Ellen Hodgson Brown said on February 5th, 2011 at 6:40pm #

    Yes, I’m ignoring the political issues; those are discussed everywhere and ad nauseum. I’m just pointing to something that doesn’t get discussed much, the role of speculation in commodities. The global food crisis will continue until we fix the monetary system. You may be right that “financial products” are included in GDP. What I meant is, “money making money” is parasitic and unsustainable, unless there are physical goods and services linked to it.

  5. Gordon Pratt said on February 5th, 2011 at 7:11pm #

    What I don’t understand is how rising prices in the futures market cause rising prices to consumers.

    The price of a loaf of bread today depends on the demand for bread today. The price of a bushel of wheat today is dependent on the price of bread today.

    The futures market is different. In the futures market a farmer sells a promise to deliver wheat in six months. A speculator buys the promise. But if in six months the price of bread has plummeted it is the speculator who takes a bath. Hehas no means of forcing the consumer to pay a price above markets for his grain.

    Sure the speculator can buy more futures. But that raises the price a further six months out. He still has a loss for the wheat he just took delivery on.

  6. Deadbeat said on February 5th, 2011 at 7:59pm #

    The price of a loaf of bread today depends on the demand for bread today. The price of a bushel of wheat today is dependent on the price of bread today.

    These “Econ 101″ myths do not hold for today’s markets. Food and oil prices are set by the commodity markets and trade “agreements”. Farming for the most part is control by huge conglomerates. In other words there is a huge abundance of food. The real problem is ACCESS and control of food prices by the markets and large corporations — exactly how Capitalism functions.

  7. Gordon Pratt said on February 5th, 2011 at 8:20pm #

    “These “Econ 101″ myths do not hold for today’s markets.” – Deadbeat.

    I used the terms I did to make simply the point that speculation in the futures market for agricultural commodities has no way of forcing up the spot price.

    And that after all was the author’s point, not unseen machinations by unidentified forces.

  8. Deadbeat said on February 5th, 2011 at 8:30pm #

    Ms. Brown writes …

    Yes, I’m ignoring the political issues; those are discussed everywhere and ad nauseum. I’m just pointing to something that doesn’t get discussed much, the role of speculation in commodities. The global food crisis will continue until we fix the monetary system. You may be right that “financial products” are included in GDP. What I meant is, “money making money” is parasitic and unsustainable, unless there are physical goods and services linked to it.

    There are “physical goods and services” linked to what Marx describes as M-C-M’. Clearly there is a whole network of “workers” involved in the FIRE sector. I do agree that speculation in commodities is not broadly discussed in the mainstream media so Ms. Brown article is helpful but M-C-M’ is no more parasitic as C-M-C’ which is now being advertised as being “productive”.

    My point is that the monetary system cannot be “fixed” and it is counterproductive to offer false hope and false solution like Keynes and the Liberals have done for the past 80 years. Capitalism is an unstable system and money creates economic imbalances and inequality. Food is just another commodity in the Capitalism system — something to be bought and sold for PROFIT.

    by in Capitalism EVERYTHING is a commodity. All economic activity is based on something to be sold which cause a host of societal problems

  9. Don Hawkins said on February 6th, 2011 at 11:20am #

    When Mayor Bloomberg came into office there was just one executive cook at Gracie Mansion to make the VIP feasts.

    Today there are three – costing taxpayers a whopping $245,000 this year.

    And despite the big spending cuts the mayor has ordered across every city agency, too many cooks won’t be spoiling the broth at the city-owned mansion.

    According to figures revealed by the New York Daily News, his longest-serving man in the kitchen, Feliberto Estevez, picks up $97,000.

    His pastry chef Jerry Montanez who was hired in 2007 is paid $68,000 while Jose Velazquez is on $80,000 after getting a $10,000 pay rise last July.

    Last autumn, there were cutbacks in the police, fire and schools and there are more job losses to come across the board.

    Although the 69-year-old billionaire Bloomberg prefers to live at his upper East Side townhouse, he does a lot of entertaining at Gracie Mansion. Mail

    What for a poor man is a crust, for a rich man is a securitized asset class.

    — Futures trader Ann Berg

    File this under economics and the twilight zone.

  10. Don Hawkins said on February 6th, 2011 at 12:04pm #

    SANTA BARBARA, Calif., Feb 4 (Reuters) – Republican Sarah Palin said on Friday an explosion of government spending and debt under President Barack Obama and his fellow Democrats had put the United States on “the road to ruin.”

    In a tribute to former President Ronald Reagan, the potential 2012 White House contender said leaders in Washington had lost sight of the values that made Reagan a Republican icon and a hero to conservatives — a belief in limited government, low taxes and personal freedoms.

    “This is not the road to national greatness, it is the road to ruin,” Palin said of the growth in government spending, budget deficits, joblessness and housing foreclosures under Obama.

    National greatness yes here come the messages.

    It is intolerable to us that an erroneous thought should exist anywhere in the world, however secret and powerless it may be. Watch those erroneous thought’s as I sure will the messages the messages and has Washington lost sight? Huckabee and Palin, Beck can be the preacher man Donald Trump Secretary of the Treasure Bloomberg can head the Fed.

    O cruel, needless misunderstanding! O stubborn, self-willed exile from the loving breast! I love Super Bowl Sunday it’s my favorite day of the year.

  11. Don Hawkins said on February 6th, 2011 at 1:19pm #

    I watched the Ronald Reagan tribute and a 389.69 ppm I mean pound elephant was in Simi Valley today. It was invisible but with these glasses I have I saw it. Truth, freedom, justice the road to national greatness for all of us securitized asset classes was there for all to see.