Op-Eds Speaking Truth to the Powers-That-Be
Would you like an overpriced barrel of oil or bushel of wheat with your Big Mac? The price of everything that you eat, wear, use or just enjoy has been skyrocketing. The dollar loaf of bread in the Clinton Administration that was $1.99 under W. is now climbing to $3.29 today. A Big Mac that was $4.50 a few years back for the whole meal is now up to $4.34 for just the sandwich in New York. All of this inflation is derived from the commodities markets, where the raw materials that make up the finished goods that you consume are traded.
According to the USDA, wheat, which fetched about $14.30 per cwt in Q1 of 2006-2007 is at $23.66 per cwt in the third quarter of 2010-2011 a 66% price jump in five years. Sugar was $16.90/lb ,in May 2006. In April, 2011 it was 23.91. That is a 42% increase. After a global rice shortage in 2008 that prompted near-riot conditions in countries where it is a larger staple food, a metric ton went from $301.56/mt to $500.57/mt, also a 66% increase.
What drives these price run-ups? Supply and demand is supposed to be the engine of the commodities market, but as we learned about the oil price manipulation schemes by big players like Koch Industries (“Things Get Worse With Koch: Tea Party Pumps Up $4 Gas“) that is contributing mightily to the rise in the costs of everything, has been on the most dramatic upswing. Over the same period from 2006 to May of 2011, oil has soared from 23.18/barrel to $117.12/barrel today, a 405% increase.
That increases the shipping price of raw and finished goods, and has sent everything from a car to a package for grandma to a loaf of bread soaring. The reason? The same type of manipulation scheme that worked in oil has been used since the turn of the century by mega-traders like the Koch Brothers and Goldman Sachs. Commodities were the one market that could be gamed with less regulation. The Commodity Futures Trading Commission (CFTC), the main regulator of commodity markets, is a toothless set of hacks from Wall Street and Chicago’s commodities exchange businesses who bend over backwards to avoid being the tough sheriff in town.
Traders like Goldman and the Kochs, who control billions of dollars in commodities buys, can affect and alter the supply/demand curves of the commodities market by the shear volume of their buying power, just like the mega hedge funds that almost shorted the stock market to death in 2008. They put the pedal to the metal, sending the market zooming up or down, to their profit. The Financial Express of India reported the phenomenon in 2008:
“Mismanagement in the supply-demand chain and the increase in broad money supply are the causes for inflation in prices, experts say.”
Right-wingers who want to protect this game will tell you that it is all just supply and demand. The world population is not only growing, but growing in access to commodities and goods that they heretofore could not have participated in. Nonsense. We have subsidized farmers in this country for decades because they grow too much and we can’t put all of it out on the market. We have warehouses of cheese and grain silos that never see a granary or a bakery or a home outside of where that stuff sits and rots.
Price drops are no longer a matter of supply and demand. Goldman Sachs, in 2006 took the market in oil way down to profit on short-selling of the commodity. Jim Willie, a Commodities Broker, writes this op-ed in “The Market Oracle” in November of 2007:
“The ugliest example of illicit publicly noticed activity by Goldman Sachs in my opinion was the late summer 2006 change to the GS Commodity Index. They lowered the unleaded gasoline weight from 9% to 2%, forcing the sale of $7 billion in gasoline contracts. Nevermind motive, focus on execution. With $100 billion in indexed funds invested in the GSCI, Goldman knew what would happen. Gasoline fell sharply in price. GSax profited heavily, all legal, not even a prosecutable violation.”
The CFTC had to be pushed in 2008 into doing something by lawmakers facing angry voters looking for answers as to why the economy was falling to pieces. As the Financial Times of London reported:
[The CFTC] told the US Congress on Thursday it was imposing “enhanced control” on dealing by Wall Street banks and forcing them to publish new data on their positions.
The CFTC’s measures will focus on swaps — private contracts between investment banks and clients such as hedge funds or airlines that provide an exposure to commodity prices without investing directly in futures.
The swap market is mostly unregulated, which some lawmakers in Washington have described as a loophole for speculators and blamed for high oil prices. Swap dealers also receive exemptions for speculative positions limits that apply to other speculators in the commodities markets.
The CFTC admitted in a report that there was a “a need for greater transparency in the manner and amount of trading that occurs trough swap dealers.”
The move signals a growing concern among regulators about the activities of financial investors into the commodities. But in a rare dissident vote, Bart Chilton, one of the four CFTC commissioners, said the actions were insufficient. “I do not believe the commission’s recommendations go far enough,” he said.
“We need to have a sheriff in the saddle, to make sure these markets are honest,” he said.”
We never got our commodities Wyatt Earp though. Oil producers stepped up production during the 2008 bubble, and the product pirates, fearing regulation, turned down the heat on gaming in oil trading for a time, which eased up the market. The three oil commodities brokers, small fish all, that were indicted at the end of last month were the first prosecutions by the CFTC of rampant abuse that has been going on for more than a decade.
The Obama Administration, loathe to upset conservative voters with more talk of regulation before the 2012 election year, has been very mum on the subject of tougher commodities regulation. The Republicans control too much of Capitol Hill for Mr. Obama to put his political foot in those K Street crocodile-infested waters.
While it is the political expedient, it is not good policy to protect the American people, or to cool down the overheated economy which is, in large part, due to the manipulation of the basic staple goods which hurt not only average Americans, but people from lower and middle incomes all over the world.
We need to stop subsidizing farmers, and have them put their full output on to the world scene. That is an easy sell to Republicans, who’ve been wanting that for some time. After 2012, if we are fortunate enough not to have a Tea Party whack job in the Oval Office, Mr. Obama should then take his long lame duck and lower the boom on the commodities cheats, and throw major players from the Koch Industries Club and Goldman Sachs into courtrooms, and with any luck, behind bars.
If we’re going to have to pay $10.00 for a Big Mac meal, the least we can do is keep guys who’ve reaped billions from gaming the market from enjoying them when the vast majority of us can no longer afford the luxury due to their excess.
My shiny two.