Tim Sahay aka 70sBacchan on Twitter, reviews "Price Wars" by Rupert Russell, a book about how financialized commodity markets sow political chaos
Like so many of our troubles today, this chaos was conceived in the triumphant frenzy of deregulation which followed the collapse of the USSR.
It may seem unbelievable today, but until the Commodity Futures Modernization Act of 2000, retail investors couldn’t bet on the direction of commodity prices. The index funds simply didn’t exist yet. Investment banks and oil companies pushed provisions into the act in the waning hours of the 106th Congress exempting the trading of futures contracts and swaps for energy and metals from regulation. Most commodities derivatives are traded in unregulated over-the-counter markets run by dealer banks in the United States and Britain.
What sounded like clever market-based thinking proved to be good only for traders.
They were marketed to investors as helping diversify portfolio risk, but instead, they compounded it. Previously uncorrelated, oil, food, and metals became increasingly linked as a volatile new asset class. As commodity index funds proliferated, local disturbances in crop yields, amplified by leveraged bets of traders, gained the power to rip through global markets, destabilizing prices in far-flung areas with cascading knock-on effects.
High food prices are blamed/credited for the Arab Spring, which already feels like it was in another century. But the high prices had nothing to do with harvests, and everything to do with money orphaned by the 2007 crash going sniffing for returns.
There are really only four markets: housing, bonds, equities, and commodities. After the housing crash in 2007, the behavior of investors changed. Institutional money fled housing and equities, and flowed into commodities and bonds. Commodities are a small market in the hundreds of billions, compared to the trillions whooshing down from housing. It was that flow of money, not a supply-and-demand “fundamentals” effect, that caused prices to spike, triggering food riots in 2008.
Book ordered.
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