On March 20th and 21st, the International Monetary Fund hosted a conference at its headquarters in Washington DC. Entitled “Understanding International Commodity Price Fluctuations,” the conference participants focused on possible explanations for recent commodity price spikes. However, no one in attendance dared address the elephant in the room – “financialization” of the commodity markets. Unfortunately this comes as no surprise given that the room was filled with economists, the high priests of capitalism.
To be fair, the presentations by a host of learned scholars offered a range of explanations for why the price of oil, corn, rice and other commodities have risen so dramatically in recent years. However, many of the economists presenting their research looked for novel explanations for price rises, only to discount their own research as being inconclusive on the basic question.
On several occasions, the elephant known as “financialization” was mentioned but never adequately acknowledged. The “Masters Hypothesis,” which seeks to explain this phenomenon and attributed is to the seminal research done by Mike Masters, an Atlanta-based hedge fund manager, found that price spikes across almost all commodities can be largely attributed to the weight of money that has flowed into the commodity markets. This new money was injected into the commodity markets by financial investors who sought greener pastures after the global financial collapse in 2007 and 2008.
While many of the presenters at the IMF conference pointed to a range of causes – from government regulation of commodity exports to natural occurrences in the global economy – the inherent refusal to admit that the markets, and those who run them, bore primary responsibility for out-of-control market fluctuations was palpable.
Bubbles in Food Prices: The Evidence is Irrelevant to the Economic Theory
One of the leading detractors to the Masters Hypothesis is Scott Irwin, an economist from the University of Illinois. Perhaps best known for his OECD financed paper that argued that there is no causal relationship between commodity speculation and price volatility, Mr. Irwin presented a paper arguing in essence that the speculative bubble experienced in 2008 was not in fact a bubble, when compared to a range of similar events occurring over the last 42 years. Arguing that bubbles last on average less than 20 days, implying that the extraordinary commodity market event in 2008 was not such an event. However, in redefining the event to fit his worldview, Mr. Irwin effectively played a linguistic slight of hand, redefining an event that had profound effects on the world’s most vulnerable people.
Financial speculators were largely responsible for the social crises that were to follow from unfettered profit taking in markets that were created to mitigate risk to farmers, food producers and energy consumers around the world. To ignore the naked truth by embracing the economic ideology that pervaded this two day conference did little to address the core problems created from out of control commodity markets.