What made the 2010s commodity markets so tumultuous?
Farwa Sial is a Research Fellow at the University of Manchester in the UK
Cross-posted from the Developing Economics blog
In Price Wars: How the Commodities Markets Made Our Chaotic World, sociologist and filmmaker Rupert Russell travelled to some of the world’s most chaotic places: war zones in Ukraine, Iraq, and Somalia, the climate wars in Kenya and Guatemala, and Venezuela’s economic catastrophe. Told as gonzo investigation into what made the 2010s so tumultuous, Russell links each of these eruptions to swings in commodity prices, and the financial speculators whose bets set their prices.
Farwa Sial: The central tenant of your book ‘Price wars’ is questioning the seemingly neutral basis of prices of goods and services. You frame pricing as a magical system, comparing diverse examples such as Alan Greenspan’s belief in the invisible hand of the market to the belief of the Melanesian cargo cultists. What exactly is the problem with the pricing system?
Rupert Russel: I found it profoundly strange that perhaps the most consequential social invention – market prices – are so little understood. We see the impacts of prices everywhere: oil and gas prices in Ukraine, bond prices on government spending, food prices on hunger and poverty, inflation statistics on government approvals, to name just a few. But how these prices are formed is ultimately a mystery. If I, or anyone else could tell you, they’d be a trillionaire – or richer. Indeed, banks and hedge funds pour endless resources in trying to divine what really makes a price, and if they can for a fraction of a second, untold riches can be – and occasionally are – unlocked. Prices are at once familiar, we use them every day, but just like peering down a microscope, when truly interrogated even everyday objects appear alien.
Prices are supposed to be formed through the negotiation of the world’s buyers and sellers. Usually, we think of that as people trading physical goods or timely services. But over the last three decades, other ‘buyers’ and ‘sellers’ have entered this market with different motivations. These are the banks, hedge funds, university endowments, and asset managers who see the economy as divided upon into distinct asset classes. Crucially, these enter a kind of meta-market where they are priced relative to one another, and not those physical and timely parts they’re supposed to. Commodities, as my chosen example, were turned into an asset class, and this ‘asset’ was then used to ‘hedge’ against inflation or ensure ‘diversification’ from the volatility of the stock market.
Furthermore, when a market becomes truly speculative – or dominated by speculators – the game is won not by guessing where the real-world fundamental economy is heading. Instead, as Keynes showed in the 1930s, it is guessing what the other guessers are guessing. Trading strategies are simply new ways of trying to win this guessing game, and each year brings new tactics and strategies, as hedge funds compete in an arms-race like fashion. One of many strange examples I found, was the use of satellite data to predict harvests. What the hedge funds wanted from the start-up that produced crop-predictions based on such data was not the real harvest projections, but what other government reports (think of the ending of Trading Places), said they would be. Because that’s what the other speculator – or guessers – would be reacting to.
This to me was totally insane, and revealed the insanity of social arrangement by which we produce and distribute essential goods like food and fuel. When I say we do not really know what makes prices, it’s because the strategies these hedge funds are using are secretive. We can see the incentives, but the actual mechanisms are hidden from view. This is a political choice, and a very recent one. But despite the lack of transparency, the effects of this alto-driven guessing game are all too clear. The volatility is rising year on year. Any information entering the market – be it a climate shock, a war, a revolution – is amplified. I wrote in the book about ISIS invading Mosul pushing up oil prices by $5 over a week. That was headline news in the Financial Times. That was 2014. This year, we’re seeing $30 jumps in a single day. And in 2003, before the deregulations of 2000 really had taken hold, Bush’s invasion of Iraq – magnitudes greater in terms of potential supply disruption – did not cause oil prices to jump at all. In fact, Osama Bin Laden complained vocally about this in 2004!
Farwa Sial: Isn’t it amazing to consider that global pricing is a consequence of financial deregulation in a single country? The American financial system. As you show in the book it is such an important determinant for the transformation of the global landscape leaving wars and conflicts in its wake, altering the course of life for millions of children, and wreaking unimaginable ecological havoc.
Rupert Russel: This is really where we see the US as the dominant player in the global economy. The US has frequently set the ‘rules of the game’ for the rest of the world. The finanicalisation of the commodities markets takes up the bulk of my book, but the final chapter delves into the longer history of the commodities markets.
The OPEC-embargo of 1973 led to the doubling – and then quadrupling – of the oil price. Oil importers across the world were forced to borrow dollars from Wall Street banks, Citi especially, to pay for the US dollar dominated oil deliveries. When Volker sent interest rates to 20% in 1979, he triggered what would become known as the Third World Debt Crisis. The Global South could no longer afford to serve the debt.
But one overlooked aspect of this story I found, was the role of Fed Chairman Arthur Burns. He was a conservative economist, and taught both Greenspan and Friedman, but was also subservient to Nixon who wanted to keep the economy running hot. He’s often neglected in the pantheon of Fed Chairs, but he made one policy change that made him perhaps the most consequential for the rest of the world. When Peru defaulted on its debts to Wall Street in 1976 and 1977, it was Burns who reimagined the IMF as world’s debt enforcer. He was facing his own Lehmann moment: if countries began defaulting on loans made to US banks, the US financial system could implode. So his solution was to simply make them pay back the loans in full through the IMF, which would demand austerity in return.
We know what happened next. Decades of ‘structural adjustment’ programs built the Neo-liberal world order. Its origins lay, however, in the commodities crisis of the 1970s, and the Fed’s role in trying to manage the fallout as a way to protect US financial interests.
Farwa Sial: I thought the analogy of Al-Shabaab to describe how global Hedge funds operate was very interesting. For some it may be a bit far-fetched, but you successfully demonstrate that the material impact on people is the same. Can you elaborate?
Rupert Russel: When I went to Somalia and heard how Al-Shabaab operated, it kept reminding me of what I had been hearing from hedge fund managers I was interviewing. For one, it’s not entirely just an analogy. Al-Shabaab earns a large share of its income by commodity trading. By smuggling commodities, they essentially engage in a kind of tariff arbitrage. All of this is just standard economics, and it wasn’t the first place that I made the connection between financial economies and economies in chaotic places. In Iraq and Venezuela, I had also noted how militias or black-market re-sellers were also operating by the same logic I saw in the world of hedge funds. For me, finance capitalism reproduces itself on every social scale: from the absolute apex in Upper East Side penthouses all the way down to those cleaning houses in Caracas. That is, I discovered, what it means to live in a market society.
But I took the argument further in Somalia because, at the end of my journey, I was reflecting on responsibility. I’m by no means the first to argue that financial institutions drove the food price bubbles in 2008 and 2011. The UN Special Rapporteur on the Right to Food came to the same conclusion. Scholars of Somali conflict and famine showed that the drought and spike in hostilities in 2011 were only possible because of high food prices internationally. Al-Shabaab, rightly, had been accused of weaponising hunger in this period. But their use of the food weapon was only possible because of the international situation, one that had been driven by financial speculators. At least the chaos Al-Shabaab wrought was confined (largely) to the Horn of Africa. Whereas the global food price spike launched a tsunami of suffering to dozens of countries that saw spikes in hunger and poverty, riots, and revolutions. Yet, only one side of this story was being told.
The counter-argument rests on one of intention. Speculators do not intend to cause mass suffering. We can debate whether or not that matters. But what they do do, and boast about doing, is profit from chaos. It’s a truism that volatility is ‘good’ for traders. It creates opportunities for explosive profits (as well as explosive losses). When a crisis hits – a drought, a war, a revolution – speculators are the first to act. In fact, the algorithms have often traded before the human traders are even aware. And this makes many finance professionals I spoke to sanguine about political risks. Many in the City of London, for example, were relaxed – even optimistic – about Brexit. The chaos of leaving the EU was just another event certain to breed volatility; volatility they were posed to exploit.
And, as I documented in my book time and again, this volatility does bring mass human suffering. If we’re going to have a morality about suffering – as we must – we really need thing about causal cascades. And not just restrict ourselves to only blaming easy villains in faraway lands.
Farwa Sial: Rather than a break from the past, the pandemic was a reset which ended up deepening this inherently flawed pricing system. What does this mean for the future?
Rupert Russel: Sadly, the future is already playing out. When I finished the book, I wondered if the phenomena I was describing was diminishing. After all, commodities prices had been depressed overall since 2014. Economists told me of abundant overproduction of wheat and a coming green transition that would end the world’s addiction to oil. I thought that the history of the tumultuous 2010s stood up in its own right: the decade of global chaos deserved an explanation.
The war in Ukraine has shown precisely how the chaotic engine that powered the 2010s is still very much alive. In fact, the speed at which the war created chaos in the commodities markets, and those markets have transmitted that chaos across the world is far faster. Over the past six months, we’ve seen high commodity prices embolden Putin’s invasion, and that invasion has lead to surging commodity prices: inflation across the world, and a hunger crisis among the world’s most vulnerable. The way in which chaos spreads, mutates, and amplifies is due to the way in which modern financialised commodity markets are designed. This is why I called prices agents of chaos.
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