Speculation and its Discontents

Ask an educated person for a definition of capitalism and you will probably get a recitation of how the desire to make money ensures unmet demand is met. This may lead to a gross state of inequality requiring governmental remedy – and even the creation of undreamt of wants – but the essential carrot of great wealth on the horizon means that someone, somewhere will provide for basic needs – albeit at a price not everyone can afford.

Here lies the system’s essential dynamism and why, whether you like it or not, it ‘delivers the goods’ as they say.

Given the vast array of products available to people with the means to buy them, that’s an understandable viewpoint.

However, as can be seen by the current staggering inflation affecting energy and food prices, it’s not an accurate one. Capital-ism – the investment of money in order to make more money – can in fact contradict the laws of supply and demand, creating perceived shortages where none actually exist.

It’s widely accepted that the huge rises in prices for oil, gas and food are behind the massive rises in inflation in western countries. Inflation, we are told, will reach 18% in the UK by early next year. Putin’s invasion of Ukraine is seen as the catalyst for these increases driven by creating war-induced shortages of basic goods. And shortages, a basic principle of economics tell us, equal spiralling prices.

Or not, as the case may be. Despite wild jumps in wholesale prices, oil, for example, did not stop flowing. Citi, the same bank that predicts 18% inflation in Britain at the start of 2023, believes the price of oil will fall to $45 a barrel by the year’s end, not indicative of a crisis of supply. Ukraine’s imperilled status as the ‘breadbasket of the world’ prompted huge increases in the price of cereals and wheat, surging past historic highs in February and March. But now, as the Economist magazine notes, food prices are tumbling, despite the fact that, as far as anyone is aware, the war in Ukraine has not come to an end.  As it turns out, agricultural corporations saw “substantial gains” and “were not negatively affected by Russia’s invasion of Ukraine”.

So much for the ‘unbuckable’ laws of supply and demand.

The one commodity where there has been a genuine disruption of supply is natural gas, with gas flowing from Russia to Germany through the Nord Stream 1 pipeline reduced by 60%. However, the current ‘global’ price is 9 to 11 times “higher than usual” which, I would suggest, is not commensurate with cut backs in one country’s supply. Before the Ukraine war, the price of gas was already rising and, according to Shell, the influx of hedge funds and other speculators into the market was a major factor. “Prices are becoming less determined by news about supply and demand because of the influence of new financial players moving money in and out of the market,” the company was reported as saying.

These booming ‘world’ prices have caused – and are causing – real suffering to millions, if not billions, of people. Essentially the perception of scarcity, fuelled by trillions of dollars of speculative money, created artificial scarcity by inflating the price of basic commodities like food and fuel beyond the reach of ordinary people. Around 71 million more people have already been pushed into extreme poverty and the UN secretary-general has warned of an “unprecedented global hunger crisis”.

Winter in Britain is looking bleak beyond imagining with millions unable to pay soaring energy bills and thousands dying from the cold.

And this suffering is directly attributable, not just to Putin’s ‘weaponisation’ of gas, but also to the ‘wall of money’ at the top of society which has an unquenchable thirst to accumulate more wealth. The speculators – hedge funds, fund management firms, investment banks, sovereign wealth funds and pension funds – all exist for the unceasing purpose of making money out of money. According to American socialist magazine Jacobin:

As with all speculative bubbles, once cash poured in and pushed up prices, the resulting higher prices ‘confirmed’ the initial story, eliciting fresh capital sending prices even higher … Commodity exchange trade funds received $4.5 billion in a single week as retail investors ploughed their savings into the latest get-rich-quick craze. Institutional investors likewise poured money into the commodity markets, not because of any belief about fundamental supply and demand but to diversify their portfolios with and ‘inflation hedge’.

This is probably the first time in recent memory the ‘rich world’ has been seriously affected by speculation-fuelled surges in the prices of basic goods. But it’s not the first time it has happened to the majority world in this century. In both 2008 and 2010, there were “global food crises”, in which hundreds of millions of people in the Global South were propelled into extreme poverty by rising bread prices, precipitating riots and revolution in countries around the world. Yet the problem wasn’t actual scarcity. Unlike during the French Revolution when a poor harvest did precede the cresting of popular unrest, in 2008 and 2010 prices doubled despite more food being produced in that year than at any other time in history (55.45).

Perverse and unnecessary suffering like this is the consequence of a little appreciated aspect of the huge inequality bestriding the world. Inequality on this scale is not only unjust in that the billions of poor people in the developing and developed world don’t have the resources to live decent lives. Inequality on this scale generates baleful outcomes by virtue of the simple fact that immensely rich people have too much. The world’s largest fund manager, Black Rock, for example, has over $10 trillion under management. And that $10 trillion will be invested in profit-promising opportunities that, over time, will grow and grow in a never-ending process.

Fatal social problems like financial crises, the continued exploitation of fossil fuels, the undermining of democracy, the gutting of the public sector, and the recasting of housing as simply a means to amass wealth (to name a few) have their roots in this perpetual search for new sources of profit for this towering ‘wall of money’. Such activities aren’t merely “socially useless”, in the words of Adair Turner, the former chairman of the UK Financial Services Authority. They’re socially destructive.

Long ago, the economic historian, Karl Polanyi, singled out the “scarcity of Capital” as the factor which crippled “potentially rich countries from developing their natural wealth”. Now, after periodic economic crises smoothed away with bail-outs and capital-creating ‘Quantitative Easing’ schemes, we have the opposite problem. In the description of one economist, we have a glut of capital.

If, on the rare occasions that the chaos caused by commodity price speculation is squarely faced, the answer is invariably presented in terms of the imposition of World War Two-style price controls and the return of regulations that hem in the speculators. Just over 20 years ago the passing of the Commodity Futures Modernization Act in the US (signed into law by ‘New Democrat’ Bill Clinton) ended Roosevelt-era regulation in which speculation was confined to 20% of a given market.

But we are facing a very different world to the one that existed when these regulations were put into effect. According to one assessment, the volume of capital in the world tripled between 1990 and 2010, reaching $600 trillion. This figure was nearly ten times the value of global goods and services, ensuring that the vast majority of it inevitably went into some form of speculation, i.e. betting on an increase in the value of an asset, such as the global price of wheat.  And this was in 2012. It was predicted, then, that global capital would hit $900 trillion by 2020.

The pressure exerted by this mass of money was a pivotal reason for the dismantling of regulation towards the end of the last century – the Commodity Futures Modernization Act was famous for exempting derivatives such as Credit Default Swaps from regulation, which many believe created a direct path to the Global Financial Crisis of 2008. Theoretically, it should be possible to re-regulate; if the hurdle of political systems being dominated by the uber-rich can be overcome. However, where would these trillions of now redundant capital go to? It wouldn’t be invested in the expansion of physical production because the demand for ‘fixed capital investment’, as it’s known, is nowhere near strong enough. It also won’t just cease to exist because there is no (legal) purpose for it.

Re-regulation and the overthrow of the market fundamentalist dogma of the last forty years may be abundantly necessary but they won’t save us from what the capitalist system has become.