We’ve seen lots of talk about bubbles destroying our economy, but what are we doing to try to make sure we don’t have another one?
A bubble is caused by artificially inflated demand for a commodity. For example, the real estate bubble was caused by people who bought houses because they wanted a good investment — after all, “housing prices always go up”. But eventually the demand collapsed. The price of housing went up so far that people who, you know, actually wanted to live in a house couldn’t afford them any more. Duh.
Another bubble is oil prices. The UN estimates that speculators have driven up the price of a barrel of oil by 20 to 25%. But again, once oil gets ridiculously expensive, people stop buying it. They carpool or walk.
Now investors have found a new commodity to invest in: Food. In 2003, fund managers had $13 billion invested in food. By 2008, just five years later, that number had increased to $316 billion (yup 25 times). As a result, prices of food like bread and beef skyrocketed (and it isn’t rocket science).
What’s sickening about this is that the demand for food is stronger than the demand for housing — the spike in world food prices has brought on a spike in world hunger causing around a billion people go to bed hungry every night. Investors are betting on the price of food going up even more. According to the UN, speculation has already increased the price of food by around ten percent: “Food markets have been turned into a casino. And for no other reason than to make Wall Street money.”
I agree. And what’s worse is that hedge funds are now buying up (very cheap) arable land in third world countries around the world. To what end, one would ask? Obviously, the pursuit of monetary profits.
There’s an old Cree proverb:
Only after the last tree has been cut down
Only after the last fish has been caught
Only after the last river has been poisoned
Only then will you realize that money cannot be eaten.
I want to point out the same thing happened to textiles in the early-to-late 2000’s. Cotton has reached a new “20 year low” in speculation, meaning the cost has gone up substantially. (http://www.mongabay.com/images/commodities/charts/cotton.html)
Here you can actually see the price of a kg of cotton jump from 100 cents or so in 2010 to almost 3 times that beginning in 2011. I was actually asking my mother if she remembered shirts being this much when I was 10 and she agreed the price has gone up, much like how everything really gets inflated during a depression. But investors know people HAVE to buy clothes and the majority of them are cotton, so it helps to speculate the price even higher.
Every item, no matter how mundane, that is speculated on is always a good investment because no one is NOT going to buy gas for their car, food to eat, or clothes for themselves. This is also why those “Don’t pump gas on the 20th” events don’t work: 1 day of lost profits (especially if everyone fills up the day before) is not going to substantially affect that company because it will be offset. Whether it’s to raise prices somewhere down the road or it’s increased demand on another day, free enterprise is serious business.
This is also why I get so frustrated when people try to tell me we’re just in a depression, so everything is more expensive than say, during Clinton.
Also, by the “20 year low”, I meant to elaborate on that. The SUPPLY is supposedly at a 20 year low, although this may be only speculation and not actually the case, which would of course drive prices up. My mistake 🙂
The answer is a very aggressive progressive income tax and instead of 15% tax on capital gains, make the first 25k tax free, and the rest of it normal income. We really need to get away from supply side economics and get the money to people that will spend it. No one ever created jobs without the expectation of greater wealth, but to produce, there have to be buyers. If you’re not part of the solution, you’re part of the problem. Vote progressive, be active, make your voice heard!
And the epidemic of speculation has a piquant twist — the last bubble collapse cancels out the effects of the current bubble’s inflation on the cost of living. So even when food, fuel, and clothing are more expensive by the day, the fact that housing has imploded apparently results in an inflstion rate of zero. That means that a lot of hedges against desperation — automatic cost-of-living increases in Social Security, some States’ minimum wages, etc — get “fooled”. Wherever he is in the afterlife, Ronald Reagan must be so proud.
Aren’t we lucky, with food and cotton going up so much that the rate of inflation is almost nonexistent.
What is disappointing to me is that the Boston Globe had a two page spread about the issue of globalized food prices in order to explain why ice cream prices had increased. Normally, I would say that you’ve got to start where people are and if it takes relating speculation on the global food market of ice cream ingredients to make people understand this stuff, then that is where you go. But they did not do a good job of describing the speculation part of the equation so, it was all for naught.