Yet Another Bubble on the Horizon: Commodities

We live in an age of bubbles. I suppose that this should come as no surprise.

The Greek roots of the word "economy" are oikos and nomia. The former meaning household, and the latter its management. For most of human history, this has been the purpose of the economy, to provide the means of subsistence by which a people survive. Karl Polanyi, the author of The Great Transformation wrote in the midst of the Second World War about how the market may behave like a type of cancer. Economic activity and the production of profit is seen as an end unto itself, rather than simply the means by which societies produce the means by which they exist. And in doing so it unleashes what Polanyi called the "double movement."

The "double movement" is composed of an action and a reaction. The action is the expansion of the market so that the demands of the market, i.e. making a quick buck and the like, increasingly become the driving force in social organization. Labor and nature are commodified, as though the market itself produced them. This of course requires the believe that the market produces the children that feed the satanic mills (see Alexandra Harvey's the China Price if you think that satanic mills have gone out of style)

By making man and nature alike into commodities, the market lays the seeds of its own destruction. Because the demands of the market on mankind can not be sustained. When wages are forced beneath the subsistence level mankind cannot reproduce itself. When workers can no longer afford to have children, because starvation and illness takes thus they do produce, the market creates powerful enemies among those it presumes without power.

Labor is treated as having no more intrinsic value than sacks of potatoes. There is nothing sacred in being human. Only fodder for the market. What the economists miss in this, is that the action of the market produces a countermovement from society in order to preserve itself. Society is unwilling to commit suicide in order to fulfill the diktats of the market. Men and women eventually revolt when they are treated like objects to be bought and sold. And so we have the double movement. Society acts to push the market back into its place.

In living history, the double movement has always been at work. In the period from the 1880s to 1930s, the market was at work turning people into objects. This was the soylent green economy. The culmination of this movement came in the 1929 with the stock market crash. A financial bubble, where the market value of investments grew detached from the social value (i.e. what they would actually be consumed at), leading to a disastrous situation when the bubble popped. The human hardship of the Great Depression lead to society pushing the market back into the role that it serves best, providing the means of subsistence for society.

The problem is that when people are rendered into objects, they seek out meaning that is more substantial than markets and profit. And that force let loose can either be very good (see the New Deal) or very bad (see Hitler and the Holocaust). It's only when the market truly collapses in such a spectacular manner that the very existence of societies is at stake that you get punctuation and rapid collapse, with the necessity for non-market forces to sweep in and save the day. The harbinger of collapses of this sort are speculative bubbles where the market tries to create market value out of something that has much less value to society. The prices just don't line up. And with demand not matching supply, overproduction leads to rapid prices decreases, popping the bubble. The problem is that these popping bubbles often cause great social harm and dislocation. Think about the thousands of families forced from their homes by the foreclosure crisis.

And in the past 10 years we've seen two major bubbles burst: the internet stock bubble, and real estate. And we are on the verge of the third: Commodities.

And this bubble is far more serious than the other two, because it attacks the very fundamentals of human existence. If the price of bread becomes the subject of speculation, then the consequence is that the market price may soon rise beyond the means available to many to purchase it. And that leads to starvation. Tell a man in Nigeria that his families going to starve because some guy in New York has decided that rice options are a good "growth prospect." Can you blame the guy if he gets angry that his kids are going to starve to death so some broker can buy a boat for his lake house?

And Der Spiegel has the story. Der Spiegel's English service is one of the best sources of information for those looking for something else than the ra-ra cheerleading of the New York press. It's true that increased demand has raised the price of gas, but a far darker force is at work: speculators driven out of real estate and in search of the next bubble to build. Read the the Der Spiegel piece. I'll start you off with this.

Many people's standard of living is already at risk, and perhaps the prosperity of the nation as a whole could soon also be threatened.

The question is whether price rises are inevitable, because demand exceeds supply, or whether other, less obvious forces are at work: speculators who are taking advantage of the growing scarcity of resources to make a lot of money fast.

This is about more than just economics. It is also an ethical and highly moral question. Much depends on the answer, including the credibility of our economic system.

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Welcome aboard

and thanks for the Der Spiegel link. I read the entire article, which was excellent.

When oil moves 15% higher in two days, that is not trading on the fundamentals of supply and demand: that is emotional, that is a buying panic, and that is speculation. The one part I don't understand is how trading in "paper" commodities can drive the "real" price. Unless somebody is hoarding, at the end of the day, the actual supply of and demand for a commodity should still be determining its price.

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Futures Contracts

One of the hidden factors behind this speculative bubble is the is in futures contracts.

The easiest example is something like oil.

So lets say that I'm a big shot trader.

1) I buy a 6 month contract on 10,000 barrels of oil at $120 a barrel. So my purchase price is $1.2 million.

2) Thousands of other speculators pour their money into oil, and since there's a limited amount of it the price rises. (The supply of oil is largely geologically determined rather than being a function of the market, and it is largely fixed such that production expansions consume both large qualities of time and capital)

So lets say that in stage 1 there is 100 million barrels of oil produced in a day. At $120 a barrel that's $12 billion of total value. But the rush of money into these speculative contracts leads to a situation in which there is $15 billion put into this particular investment. Supply is fixed in the short term, so that means that if demand is constant (oil demand is largely inelastic, people will pay whatever the cost, because they have little other choice) the price must rise. These speculators demand a profit, and so long as speculators believe that prices will rise, they will rise. Economics is more about impressions than realities. What people believe matters more than what the truth of the matter is. So with $15 billion sunk into the same pool of oil, that means that a barrel is now worth $150.

So 6 months ago I bought 10,000 barrels of oil to be delivered today for $1.2 million dollars, now that oil I bought is worth $1.5 million dollars. I walk away with $300,000 having done nothing but exchanged a few pieces of paper (or more likely a few electrons). And the price of crude jumps by 25% because of the collective impact of this type of movement.

Look at the evolution of volume in commodities markets. What's happening here is that speculators are looking for someplace to make a quick buck now that returns from real estate have dried up.

And the American consumer pays the bill.

Commodities markets need to be regulated, and the use of futures contracts needs to be limited to entities that are directly involved in the process of producing or consuming a commodity. For something like wheat than means that grain silo firms should be allowed to sell futures, and bakeries and the like to purchase them. Individuals who have are using the commodity as a vehicle for investment need to be prohibited from entering the market.

If they aren't they threaten to raise the price of products so high that it isn't economical to make bread with wheat, resulting in plummeting demand, which punishes producers who have responded to increasing prices with the expectation that they won't collapse. Collapses create large scale economic losses, because they destroy the difference in value between the price of commodity as a vehicle for speculation, and its value as an input into other economic activities.

So if wheat sells on the exchange for $16 a bushel, and it's uneconomic to produce bread if wheat is more than $8 a bushel, then eventually the difference between the two is going to collapse. And the speculators who catch the train too late are left selling wheat they bought at $16 a bushel for half the price they paid. So if I bought a million bushels of wheat for $16 million, I have to sell at $8 million. $8 million of value goes poof, or more accurately is sucked out of the part of the economy that actually produces items that society needs, into the part that creates nothing of social value.

Replayed at a national scale the economic impact is tremendous, and forces us to reevaluate what it means if we live in a $15 trillion economy, where half of it is smoke and mirrors. We suddenly become substantially less wealthy than we believed ourselves to be.

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Senate Hearing

There was a Senate hearing on this, which I wrote about here.

Midtowng is pushing for the weak dollar, which I certainly agree, the weakening of the US dollar also has a lot to do about it but this hearing testimony was shocking on how bad the speculation really is. Most interesting is the "amendment" Feinstein introduced does nothing.

Here we go again with the corporate purchase of both parties frankly. (not Dorgan).

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The greatest danger that I see is in terms of the

war capacity of the nation.

In the 20th century the economic might of a nation has in large part been determined as a function of population X economic output.

The idea being that advantages in the ability to make tanks allows less populous states to overcome more populous states because technology allows one soldier to do more killing than with a rifle alone.

Now if we've seriously overestimated the productive capacity of the nation by including financial value that can't be converted into the ability to make the weapons of war, then our basic understanding of the war-making capacity of the US vis-a-vis China and other states, may significantly underestimate the threat that they pose to us if they convert civilian production to military use during economic downturns.

We've handed the Chinese government a large amount of the industrial base it needs to make a big to unseat America's position as the global hegemon through offshoring.

They may call themselves free traders but they just look like traitors to me.

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more than that

Between the Chinese spies and the outright giving away of critical technology that are major national security assets, they are conquering the US through economic means.

BTW: Good ole Carly Fiorina was advising the CIA and the DoD, so no doubt plans to offshore outsource critical technology so industry can make a fast buck. Just unreal, taxpayer dollars so some private industry can get the contract plus sell it to a potential foe.

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diktats

Hey, nice to see you here Middle! This is an excellent post and while I'll say we're on here debating which is the primary cause of this latest bubble (oil and I agree with you on speculative bubbles), the reality that people are being treated like objects, including our so called government representatives is a truth becoming most obvious. One can talk until they are blue in the face to their representatives and only get some corporate talking point blow off response, whereas if some lobbyist or super rich person speaks, they take what they say as pure gold.

I've looked at the history of unfettered capitalism and to me is sure seems like a constant state of hard bust and boom. To me our government has a responsibility to funnel those funds into investments that make sense for America instead of this glorified sociopathic gambling we have right now.

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The thing that really gets me

is that these bubbles can hide the decline of wealth producing capital by overvaluing capital invested in these speculative arrangements.

The economy has experience significant financialization in the past 50 years, so that now something like 50% of the economy is not based on production values, but on transaction costs. Credit cards create nothing of value, yet the earnings that they bring in are calculated as part of GDP.

So the bottom line is when the smoke and mirrors are revealed, what's the underlying productive value of the US economy in terms of the capacity to produce items of value? And what is the impact of that revelation on the American standard of living.

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Oil and Food commodities speculation is here

Hi.

Just found your blog off a kind person's link to DKos.

I also write a mainly political blog, but I was fascinated (still am) how the futures trading impacts oil and food prices around the world.

The short of it is this: the rich fu**s, who got burned off the housing bubble, looked to create another bubble to make easy money off of.

And here it is - the oil and food bubble.

Yes, there is real scarcity in both oil (it's not a renewable resource for starters) and food (draught in Australia for a few years, other natural disasters etc etc).

But the MAIN reason for these horrible prices, for the poor priced out from food around the world, for world economy sputtering and choking on the high price of oil, is of course speculation.

Not that you will hear this truth from CNBC and other financial "experts" on TV who keep shouting about China's and India's demand... riiiiiight, it's China's and India's fault that the price of oil increases $11 per day;

remember, price increases like that took YEARS before.

The key quote from Der Spiegel is this:
"Signs of unusual behavior abound across the commodities markets. Take cotton, for example. In late February, the price of cotton futures jumped by 50 percent within two weeks. But cotton farmers haven't even been able to sell half of their harvest from the previous year yet. Warehouses in the United States are fuller than they have been since 1966. Indeed, all signs point to a price decline."

I rest my case.

... But if you want some background, I want to welcome you all to my blog.

http://americangoy.blogspot.com/2008/05/so-why-are-gas-prices-rising.html

http://americangoy.blogspot.com/2008/05/oil-prices-to-be-probed-by-us-re...

http://americangoy.blogspot.com/2008/06/speculation-that-is-killing-us-a...

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Exactly the point of the current Supreme Knight!

Carl Anderson was a Regan era administration official. He's now Supreme Knight of the Knights of Columbus- a religious conservative group that has been fighting for the rights of immigrant labor (and providing their families security) for over 125 years now.

He recently wrote a book, A Civilization of Love, http://www.acivilizationoflove.com/cl/index.html , that makes EXACTLY this point. While he doesn't foresee any possibility of ending Corporatism and Globalism, he does say that Charity for the poorer countries and valuing human relationships over material goods is what will turn things around.

It's a very well researched book, and I recommend reading it to any who have a problem with religious conservatives and American Business right now (which, damn it, should be EVERYBODY, one way or another!).

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Maximum jobs, not maximum profits.