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August 29, 2012 5:11 PM Inflating the Next Bubble

By Ryan Cooper

(Ryan again, marking time while Ed takes some pre-convention deep breaths.)

A theory about how galloping inequality causes recessions and panics goes like this. Back during the great postwar boom, productivity gains accrued to workers, and everyone including the poorest experienced rising wages. That is no longer the case. Productivity gains now fall through to the top, and the middle class has seen stagnant or falling wages for 30 years. People have blamed this on the decline of unions, the rise of financial chicanery, or declining innovation, but the fact of wide and accelerating income and wealth inequality is undeniable.

Wealthy people tend to save a lot more, which they want to invest someplace. But because the masses have less to spend, it’s harder to find profitable real investments with much return on them. (Even if you’ve got a good idea, it’s harder to make a profit selling it if people have less money to buy it.) Thus before the last crisis the creditor class lent that money out to the middle class in the form of cheap mortgages, which fueled an enormous housing bubble. Before that they were bidding up an enormous stock bubble in tech companies.

In this view, the reason we seem to have had weak growth, and one bubble after the next in the last 20-30 years (and the reason conventional monetary policy lost traction during the 2000s, with rates staying low for years and years with little effect) is that with flat wages among the masses and enormous hoards at the top, there is too much money chasing too few places to put it.

The latest evidence of this comes from Fredrick Kaufman in Foreign Policy, telling how Wall Street is dumping money into food futures, causing the price to skyrocket:

The money tells the story. Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities — including food — seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash. “You had people who had no clue what commodities were all about suddenly buying commodities,” an analyst from the United States Department of Agriculture told me. In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets. Food inflation has remained steady since.
The money flowed, and the bankers were ready with a sparkling new casino of food derivatives. Spearheaded by oil and gas prices (the dominant commodities of the index funds) the new investment products ignited the markets of all the other indexed commodities, which led to a problem familiar to those versed in the history of tulips, dot-coms, and cheap real estate: a food bubble. Hard red spring wheat, which usually trades in the $4 to $6 dollar range per 60-pound bushel, broke all previous records as the futures contract climbed into the teens and kept on going until it topped $25. And so, from 2005 to 2008, the worldwide price of food rose 80 percent — and has kept rising. “It’s unprecedented how much investment capital we’ve seen in commodity markets,” Kendell Keith, president of the National Grain and Feed Association, told me. “There’s no question there’s been speculation.” In a recently published briefing note, Olivier De Schutter, the U.N. Special Rapporteur on the Right to Food, concluded that in 2008 “a significant portion of the price spike was due to the emergence of a speculative bubble.”

The really horrible part of this is that it hurts poor people in developing countries the worst, as they spend far more of their income on food that Americans.

But the underlying story looks about the same. Sparked by gigantic hoards without productive destinations, Wall Street cranks up the derivative machine and manufactures a bunch of investment vehicles loosely tied to some underlying thing, causing its price to rise and rise.

The only question this time is how many people will starve before the bubble pops.

Follow Ryan on Twitter and his website.

Ryan Cooper is a National Correspondent at The Week, and a former web editor of the Washington Monthly. Find him on Twitter: @ryanlcooper

Comments

  • Ron Byers on August 29, 2012 6:07 PM:

    Good post Ryan. People should read it.

  • c u n d gulag on August 29, 2012 6:09 PM:

    "The only question this time is how many people will starve before the bubble pops."

    Well, one thing's for sure - a lot less if we all decide to kill these feckers and their families and eat them.

    I prefer my meat rare to medium-rare, but I'd council against that in this case for anyone who like theirs like I do - those vermin are bound to have a lot of vermin.
    I'd stew 'em, or slow-roast 'em.

    We need to start carrying signs saying, "Hey rich people - you can go from 'Well-off' to 'Well-done' in less than an hour! Share, or we'll EAT THE RICH!"

    I'm only joking.
    I am only joking, right?

  • jjm on August 29, 2012 6:10 PM:

    Absolutely spot on! This all the money at the top scenario has to topple over into chaos and the scenarios of unlimited selfishness won't help anyone.

    Michael Pollan argued that US obesity is rooted in the fact that bankers insist that food producers keep showing greater and greater gains in the marketplace, but because people can only eat so much, how could they grow their market? By supersizing everything.

  • golack on August 29, 2012 6:15 PM:

    ...and the same with emerging markets a while back too (remember the Asian Tigers?)

    Cutting the capitol gains rates have created perverse incentives and hurts everyone, even the wealthy (see charts of net wealth under Democrat and Republican presidents). Unfortunately, many of the Republican wealthy are so myopic that they can not see past the end of a dollar bill. Break a union to lower costs to you can take home more pay means less disposable income for the workers. Any given company that gets away with it may do better in the short term...but if everyone does it, the economy collapses.

  • Nancy Cadet on August 29, 2012 6:17 PM:

    Interesting analysis of a very real problem. I do see and feel the stagnating wages of US workers, as their productivity rises. Workers don't get a fair share of the profits (theyve ,lost pensions, benefits, job security, even wage increases) but the upper levels of management are living large and corporate profits don't trickle down.
    Look at the recent Caterpillar contract, ending the strike by workers. They lost, big time but had little choice. The loss of unions, and union power, has contributed to this decline in the US.

    Matt Taibbi has a great new article about the financial parasitism called "private equity" previously " leveraged buy outs" in the current Rolling Stone. Of course, this is the source of Mitt Romney's wealth, and personally, of my brother in law's bankruptcy and current homelessness / living on the edge.

  • Daryl McCullough on August 29, 2012 6:20 PM:

    In my opinion (but I'm not an economist, just an opinionated citizen) the decline of wages of ordinary people relative to the richest is to be expected whenever there is a surplus of laborers. It's just supply and demand. So the only time that there is a possibility of wage increases is in times of (nearly) full employment.

  • BobbyD on August 29, 2012 6:56 PM:

    Daryl, you've got a cart before the horse problem there.

    There is a surplus of labor because aggregate demand destruction takes place. That occurs because the proles don't have wages to spend. Less spending, less demand, less need for labor to produce that demand.

    Now we can argue that technology has decreased the need for labor...but if those productivity gains went to the workers, the money (in the hands of the proles) would still be spent on more, different things. Services, other goods, etc, and labor would be required to produce those other, different things.

    Productivity gains that decrease labor needs don't REQUIRE lower levels of employment. If the income gains are equitably distributed, it just broadens the number of goods and services across the economy.

  • SecularAnimist on August 29, 2012 7:18 PM:

    Ryan wrote: "The only question this time is how many people will starve before the bubble pops."

    The "bubble" is popping right now. We are already witnessing the collapse of agriculture world-wide, caused by anthropogenic global warming.

    The mega-droughts and floods afflicting the world's major grain-producing and exporting regions -- in the USA, Russia, Australia, China, India and elsewhere -- are just the beginning.

    And the result will be global famine, which will NEVER END. Billions of people will starve.

    As food supplies dwindle and prices skyrocket, will speculators try to take short term advantage? Sure. But that's an insignificant problem compared to the actual, and irreversible, loss of agricultural capacity.

  • Celui on August 29, 2012 7:30 PM:

    And, given the many cogent comments above, especially those which recognize the very destructive ends that all this smoke-and-mirrors 'derivatives' deception does and will bring, the simple question remains: who among us has the moral compass to demand that this speculation in 'real' necessities of life come to and end?? Comments above recognize that the first to suffer will be third world countries and the very poor among us here. But, their plight is our own, to be sure. This whole post reminds me of Romney's financial acumen: destroy to gain. Get busy and start forcing the issue. Please.

  • Mitt Romney on August 29, 2012 7:30 PM:

    The people who starve to death if wheat hits $50 a bushel, I don't know them.

    The people who make a fortune if wheat hits $50 a bushel, them I know.

    I'm not sure I see your problem

  • Eric on August 29, 2012 7:46 PM:

    Mitt and his friends problem is when there is no one who can afford to buy the wheat at $50 a bushel the price collapses.

    The argument that doesn't get effectively made often enough is that high tax rates on the top 1% aren't just a necessary thing to fund the government, they are necessary because the ultra wealthy do a lousy job of investing their wealth wisely. We need to invest it it public luxuries like high speed trains, freeway diversions like the big dig to improve cities and so on. That is the only way to achieve full employment, the natural state of capitalism is constantly improving productivity requiring less workers to provide the needs of society. The 1% can't buy enough to create demand for the displaced labor. They won't get the investment returns they want because there is nothing to invest in if there is no middle class creating demand.

  • skippy on August 29, 2012 7:46 PM:

    c u n d, i'm not as swiftian, but i've been repeatedly tweeting "tax the rich or kill the rich." i'm only kidding, right?

    ryan, off-topic, but i've just read your post on blogging anf plagiarism. just want you to kniw that your fine work here lead me to your blog, which i have book marked. so keep up the good work, both here and at your blog.

  • TCinLA on August 29, 2012 7:59 PM:

    And of course somehow that 80% increase in food cost managed to translate into no cost of living adjustments for anyone getting Social Security - that increase doesn't exist, don't you know?

  • CharlieM on August 29, 2012 8:00 PM:


    @Eric

    I don't think the price collapse @ $50 is a Mittster problem.

    Remember that this class (in the last bubble) knew the mortgages were bad and were betting on them being bad. Goldman, et. al., knew what was going on. It's what caused the crisis at AIG with multiple swaps on the same instruments. Goldman knew they were bad. The entire system was setup to bubble up and then crash and the 1% take their profit on the collapse with tax payers holding the bailout bag.
    The point of bubbling here isn't to make it on the way up, you make it on the collapse. They capitalize on the greedy riding it on the upside by positioning on the downside.
    Same thing happened with the tech crash in 2000-2001.

    Ed's asking the wrong question here. The real starvation will happen after the bubble pops, not on the way up.

  • Greg on August 29, 2012 8:40 PM:

    The article is correct, but it is not the "latest" evidence. The article is from April 2011.

  • PEA on August 29, 2012 9:39 PM:

    And when the 99% here and abroad suffer further consequences of this or other bubbles and crashes, the uber-rich are quick to step in and buy up whatever land,water, other resources they want at rock bottom prices. The jobs they create are for people they hire to find ways for them to avoid taxes and make out like the bandits they are under any circumstance. (and if we thought the military was good at strategic planning... they can't hold a candle to these guys.)

  • Bob M on August 29, 2012 11:06 PM:

    Uh, speculation in the commodities markets hurts speculators the most. The rise in prices was not speculation, period. Try supply and demand.

    Interesting about the money flow to commodities, though. The people with money (i.e., the rich, the 1%, etc) are basically spuds and this is just the latest way to separate them from their cash.

  • Texas Aggie on August 30, 2012 7:39 AM:

    True enough and this phenomenon was recognized several years ago when the financial bubble popped and the first food crisis with its attendant riots took place.

    I work with agricultural development in the developing world and I feel the only way to counteract this behavior is if local people can feed themselves. Obviously it won't happen completely, but the more people are food sufficient, the better off they are.

    For the moment we have the problem that too many "serious people" have been pushing the idea that countries should do what they are best at and import food rather than produce it themselves. That needs to change and the methods of production in the developing world need to change. Up until now the "serious people" have been diverting resources that could have gone to agriculture research into glitzier areas that sparkle more than mundane things like ag research.

  • paul on August 30, 2012 8:16 AM:

    Golack is right about capital gains: it seems like wonkery, but it's a big deal when taking money out of a business (by selling the stock to some poor sucker) incurs a lower tax burden than collecting the profits. There's a focus on mostly-illusory growth at the expense of the long term.

    If we changed the holding period for longterm capital gains treatment to, say, five years instead of one, things would be different.

  • Doug on August 30, 2012 7:30 PM:

    Stock market/financial crashes occurred in 2008, 1987, 1929, 1907, 1893, and 1873. There was also a bank panic in 1836 but, as I have no records at hand for the 1840s and 1850s I have to omit those decades.
    Still, what I find interesting is that, except for the 58-year period between 1929 and 1987, crashes or major panics occurred roughly every 20 years; ie, after just enough time to dig out from the effects of the previous crash/panic. I also find it extremely interesting that during the period 1938 to 1986, the highest marginal income tax rate was always over 50%, from 1942 until 1961 the highest marginal rate was 91%, and there were NO crashes or panics. While it's only one point of data, surely it's suggestive enough to warrant a major examination by economists?
    I'm not an economist, but the above suggests to me that Mr. Cooper's statement "Back during the great post-war boom, productivity gains accrued to workers, and everyone including the poorest experience rising wages" should have continued "because faced with option of paying massive Federal taxes or increasing the pay of their employees, firms chose the latter."
    High marginal income tax rates FORCE both inheritors of wealth and CEOs to look further ahead than the next quarter, otherwise they risk paying most of their income to the IRS. Similarly, requiring that property, whether real or otherwise, in order to meet the qualifications for a capital gains reduction in taxes, be held for a five- or ten-year period. Higher wages, greater investment in R&D, less "churning" of the markets. What's not to like?
    To me the above, if a bit simplistically, explains an awful lot about the present state of our economy. Very, very few inheritors of great wealth are trained to manage their own financial affairs, while too many of those in charge of corporations, not being the founders, are there only for the short term.
    Unless or until that changes, we'll continue to see the middle class decline, the 1% amass an even greater part of the national wealth and I shudder to think of what it will be like for the truly poor!

  • SqueakyRat on September 04, 2012 3:20 PM:

    Marx said that.

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