The Vampire Squid and the Garden

Drought map via NOAA
Yellow is lower level drought, dark red is higher

The Globe and Mail Report on Business (01 August 2014, p B1, B8) ran a report on how rising prices are starting to impact consumer meat choices, and how that's affecting the bottom line of Maple Leaf Meats (who are currently restructuring). The article points out how bacon prices are up by about 26 percent and pork chops are up 18 percent, even though Statistics Canada claims prices are only up 3 percent from a year earlier.

There are a number of reasons offered for the rise in meat prices; the arrival of a piglet-killing virus (porcine epidemic diarrhoea) which has driven up the cost of a pig by 24 percent, the drought of 2012 that drove up the cost of feed and led to herd culls, and a 5 percent depreciation of the Canadian dollar pushing prices higher north of the border. BMO Capital Markets economist Aaron Goertzen takes the “most obvious statement of the year” award by pointing out that consumers are avoiding the now-pricier beef and pork by buying chicken or cheaper kinds of protein.

But one reason for higher prices gets no traction in the article at all—or indeed pretty much anywhere else with the exception of the New England Complex Systems Institute (NECSI). NECSI has been warning about the influence of futures traders in the food system for several years now. As did Matt Taibbi in Griftopia: bubble machines, vampiresquids, and the long con that is breaking America (2010), upon which I'm relying for for describing the system.

In a functioning commodity market, there are three players; buyers, sellers, and speculators called futures traders. Buyers and sellers (farmers and food companies) can arrange contracts with each other to guarantee the price of a commodity like wheat or corn (or pretty much any other physical substance, like platinum or oil). A producer wants to ensure that they get a fair price for their wheat, so they offer a future delivery for an agreed-upon price. This works for a buyer, as they want to have a certain and non-fluctuating price for the commodity they need. Called physical hedging, these contracts allow an amount of certainty in an uncertain world. If the price of a commodity rises unexpectedly, the producer forgoes some profit in exchange for a guaranteed price. If the price drops, the buyer forgoes some profit in exchange for a guaranteed price.

But to fully function, there needs to be another player: the speculator. Their role is to guarantee that the physical hedgers, the buyers and sellers of commodities, always have a place to buy or sell. If you bring a commodity to market and there are no buyers at the moment (even for future delivery), you still want to sell your product. The speculator buys the contract, offering a discounted price (because there's a lot of supply, but less demand). Later, when buyers come to market looking for product, the speculator offers the contract for some percentage over what they paid (higher demand, lower supply).

This works well, moderating price spikes as long as the speculators are watched very carefully. If speculators are allowed to buy all of a commodity (or contracts on future delivery of that commodity) or even a significant percentage of the contracts or commodity, this creates a condition of artificial scarcity which allows the speculator to manipulate the price. As Matt Taibbi puts it “[T]he government sets up position limits, which guarantee that at any given moment, the trading on the commodity market would be dominated by the physical hedgers, with the speculators playing a purely functional role in the margins to keep things running smoothly”. This system ensures that the speculators will make a reasonable steady profit—but not the massive, crazy profit levels that market manipulation offer.

So in 1991, the Commodity Futures Trading Commission re-defined speculators as physical hedgers, and freed at least 16 very large companies (including the vampire squid that is Goldman Sachs) to pursue unlimited futures speculation in the commodity markets. This was kept very very quiet, and by 2008, fully 80 percent of the action on the commodity exchanges was speculative.

But not just anyone could speculate on the commodity exchanges—you had to be one of the 16 companies allowed to do this. And those 16 companies had set themselves up as the unavoidable middlemen in commodities index speculation.

You remember 2008, right? The year the bubble burst and countries around the world took the hit to keep the one percent in Maseratis and mansions? The year we bailed out the various vampire squid that lied, cheated, and stole everything that wasn't nailed down (and a lot that was)? Well, a lot of money went looking for a new home that wasn't a falsified Collateral Debt Obligation or one of the many other fraudulent products that had been peddled hither and yon.

“So why not bet on something people can't do without—like food or gas or oil? What could be safer than that? As if people will ever stop buying gasoline! Or wheat! Hell, this is America. Motherfuckers be eating pasta and cran muffins by the metric ton for the next ten centuries! Look at the asses of people in this country. Just let them try to cut back on wheat, and sugar, and corn!

At least that's what Goldman Sachs told its institutional investors back in 2005, in a pamphlet entitled Investing and Trading in the Goldman Sachs Commodities Index, given out mainly to pension funds and the like.” (Taibbi, Griftopia, 2010. pp. 141, 142)

And that money, heading into the commodities market, has screwed things up ever since. When a hundred million dollars is often enough to completely eat a commodity class, this skews the market, driving up prices for consumers. This type of speculation is hoarding, creating an artificial scarcity that drives prices north for no reason except to provide speculative return. And while you and I have bank accounts that return nothing at all in interest, speculative big money has access to different investments than we do, and a demand for big returns (like a steady 10 percent, for example). And if you control supply, and therefore price at market, you can pretty much define what return you want to get. Ten percent compounded will double your money in about seven years. And who wouldn't want that?

While there are temporary or local shortages in various commodities, like drought in the US, these are not enough to explain the increases we're seeing in commodity prices. Worldwide, for example, oil production has remained steady or even risen. But prices at the pump haven't reflected this. Pump prices reflect one influence only—the impact of massive amounts of money being invested in the commodity markets driving up prices. This isn't classical free markets. This is monopoly market capitalism. Access isn't available to everyone, markets aren't transparent, and Adam Smith's* “invisible hand” has been ground under a bankster's** boot into a bloody pulp. This is late stage capital stripping every last bit of value before abandoning our countries to some new status that's even lower than what we think of as “third world”.

It's all very disheartening (or, more honestly, terrifying). But there are signs of hope—at least I see them as signs of hope. I was passing a house the other day and saw a familiar sight; an upholstered chair at the curb with a “free” sign on it. The chair probably cost three or four hundred dollars when it was purchased about ten years back. Making it worth maybe $25 at a second-hand store that would accept it as a donation. But the owners knew that the chair had a value, and probably more than $25. They knew what it had cost, how it had been used, and that it had an ongoing value. But they were willing to forgo that value if someone would find the chair useful.

Think how many times you've done the same thing: given something away because its value had dropped for you and someone else could use it. I've got five or six dozen one litre mason jars that were given to me by a complete stranger. Mason jars don't really lose value—they're maybe not endlessly reusable, but certainly have very long life-spans.

I'm also a member of Victoria Freecycle, an email listserv that allows people to offer stuff for reuse before trashing or recycling. It's another way to recognize value in use. Then there's Freeskool, where people that know stuff teach people who want to learn stuff (last year I learned how to make toothpaste at home). Or the group of younger folk fed up with their cell service providers who are working toward a not-for-profit Co-op model cell service (and receive tremendous outpourings of practical support when they bring the topic up in public forums. I expect their Kickstarter to be a runaway success).

The gift economy, Co-operatives, CSAs (Community Supported Agriculture, where people absorb some of the risk faced by farmers in exchange for a share of the production). All of these and more are showing that we recognize that the capitalist economy is just something we made up and if we want to, we can make something different up.

If we take a little stroll away from the current system, if we have a little faith in each other, treat each other a little better, we can make everything a little more resilient, more sustainable, more human.

* It is interesting to learn that Adam Smith was instructed in how the economy worked by Scots who were themselves slave-holding absentee producers working land taken by genocide. This may have skewed their economic worldview.

** Bankster = Banker + gangster. Certainly in use in the 1980s. I wouldn't be surprised if it pre-dated the Great Depression.