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Wall Street – Fisting America

22 Mar
Photo of a McDonald's Quarter Pounder (Royale)...

Image not really related to topic, but it looked good

Anybody that drives a car and hasn’t noticed the high gas prices today is either blind (and therefore really shouldn’t be driving) or lying. If you listen, read, watch any news source you’ll most likely hear the reason for these gas prices is all the hub-bub going on in the Middle East, what with their demands for freedom and all. I believed that reason myself, it made perfect sense, a lot of our oil comes from the Middle East, crazy shit is going down there, therefore expensive oil. Turns out that’s not entirely accurate.

I recently discovered a blog post written by one Chris Peterson entitled, “Why Gas Is So Expensive Today (Hint: It’s Not Libya)

It’s a long stinkin’ read but extremely informative, the author references numerous sources for his information. Long and short of it is that while the events in the Middle East may cause oil prices to stutter, it’s definitely not the primary culprit. Turns out the source for the prices is Wall Street and a little thing called commodities trading. This method of investing is perpetrated by large banks for no other reason than making the rich richer. This type of gambling is also performed against livestock, wheat, soy and corn (perhaps you’ve heard about the rising costs of those items as well). This kind of behavior actually destroyed our economy once before, and FDR placed restrictions in place to prevent it from happening again. Well, in the early 90s a Goldman Sachs subsidiary wrote to the Commodity Futures Trading Commission and asked for an exception to the rule that essentially opened the doors for what we’re seeing today. A referenced article draws up a nice explanation for us.

To look at this another way—just to make it easy—let’s create something we call the McDonaldland Menu Index (MMI). The MMI is based upon the price of eleven McDonald’s products, including the Big Mac, the Quarter Pounder, the shake, fries, and hash browns. Let’s say the total price of those eleven products on November l, 2010, is $37.90. Now let’s say you bet $1,000 on the McDonaldland Menu Index on that date, November 1. A month later, the total price of those eleven products is now $39.72.

Well, gosh, that’s a 4.8 percent price increase. Since you put $1,000 into the MMI on November 1, on December 1 you’ve now got $1,048. A smart investment!

Just to be clear—you didn’t actually buy $1,000 worth of Big Macs and fries and shakes. All you did is bet $1,000 on the prices of Big Macs and fries and shakes.

But here’s the thing: if you were just some schmuck on the street and you wanted to gamble on this nonsense, you couldn’t do it, because your behavior would be speculative and restricted under that old 1936 Commodity Exchange Act, which supposedly maintained that delicate balance between speculator and physical hedger (i.e., the real producers/consumers). Same goes for a giant pension fund or a trust that didn’t have one of those magic letters. Even if you wanted into this craziness, you couldn’t get in, because it was barred to the Common Speculator. The only way for you to get to the gaming table was, in essence, to rent the speculator-hedger exemption that the government had quietly given to companies like Goldman Sachs via those sixteen letters.

So the gist of it is that investors are gambling on the price of items and nothing more. When a supplier and a purchaser are buying and selling in fairly equal amounts the price remains pretty stable, only rising slowly with standard inflation, but when index speculators throw their cash into the mix it screws everything up and drives the price up. To put it another way.

To use an example frequently offered by Masters, imagine if someone continually showed up at car dealerships and asked to buy $500,000 worth of cars. This mystery person doesn’t care how many cars, mind you, he just wants a half million bucks’ worth. Eventually, someone is going to sell that guy one car for $500,000. Put enough of those people out there visiting car dealerships, your car market is going to get very weird very quickly. Soon enough, the people who are coming into the dealership looking to buy cars they actually plan on driving are going to find that they’ve been priced out of the market.

From 2003 to 2008, the amount of money invested in commodity indices rose from $13 billion to $317 billion. During that same time, the prices of all commodities rose sharply, by an average of 200%. The top oil analyst at Goldman Sachs admitted, in May 2008, that “without question the increased fund flow into commodities has boosted prices.” Around that time it was discovered that oil supply was at an all-time high and demand, falling. In April 2008 the secretary-general of OPEC, said that “oil supply to the market is enough and high oil prices are not due to a shortage of crude.

The events in Libya are being unfairly blamed for the reduced oil supply, despite the fact that they only contribute 1.5 million barrels per day (of the roughly 85.6 million per day worldwide). But here’s a fun fact, JP Morgan owns over 270 million barrels of oil, so much that they’ve had to start buying supertankers to store it offshore due to a lack of land.

So don’t let anybody tell you different. The Middle East events and OPECs production levels are not to blame, the blame falls squarely on greedy investors looking to get rich with shady investment techniques. Kind of makes you wonder why Congress hasn’t done anything to fix this.

 

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Posted by on March 22, 2011 in General

 

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