It is now almost a year since the current financial crisis was triggered by the implosion of the housing bubble in the US. But no-one can tell yet which way this crisis will go, when its snowball effect will stop, whether it will still trigger devastating chain reactions, nor how far they will go.
Shortly after Alistair Darling risked making a parallel between the present crisis and the Great Depression of the 1920s and 30s, the Bank of England produced an assessment of the crisis which is a catalogue of contradictions. On the one hand, it more or less claims that the worst of the crisis may be over. But, at the same time, it details a long list of reasons which could result in its aggravation. And guess what? One of the reasons for the Bank's economists to be worried, is a risk that big capitalists might behave recklessly! Of course, they did not formulate it in these exact words. But this was the gist of their report. As if capitalists are not always reckless - that is, irresponsible towards society, no matter what!
In an official statement issued this week, Jean-Claude Trichet, head of the European Central Bank (the governing body of the euro) takes a far less diplomatic line. We are seeing, he says, an "on-going, very significant market correction" - the euphemism used by those who refuse to call the crisis by its name. He goes on to say that the world's turmoil, and more specifically the explosion of oil prices, threatens to cripple Europe's industry, much like in the 1970s. His conclusion is that unlike in the 1970s, governments should take drastic austerity measures and keep the lid tight on wages. In other words, the message is: get the working population to foot the bill. In passing, Trichet hails the "responsibility" of Europe's financial companies and regulatory bodies. Never mind the fact that European banks have been caught with their fingers in the subprime pie and forced to write off billions of pounds worth of bad debt - just like their British and US counterparts.
Banks, multinational companies and governments alike may well employ armies of economic experts. But they are just as incapable as we are of predicting what will come out of this crisis, let alone of controlling it. All they can do is to try to explain its causes and assess its damage. But because most of these experts represent the vested interests of the system, even their explanations and assessments are primarily designed to provide the capitalist system with a clean bill of health.
We are not economists. Nor do we have access to most of the data sources which economists can use, if only because a large part of this data is carefully concealed from the public and often protected by devices such as "commercial confidentiality". Fortunately for us, however, there are realities which are so blatant that they can hardly be denied. And it is often possible to dig some elements of truth out of the contradictory analyses and polemics produced by the economists of the capitalist class.
Capitalist finance shrinks the economy
Unlike Alistair Darling, we will not risk a parallel with the Great Depression, if only because a lot has changed in the world since that time, but above all because it is still too early to know how far the present crisis will go. However it is right to say that the fundamental factor which led to the 1929 Crash, the greed of a tiny layer of capitalist profiteers, is the same that led to the present crisis - but, of course, this is not what the City's Darling meant with his parallel.
It is also right to say that this crisis is at least as serious as, and possibly more serious than the crisis of the 1970s, when the collapse of the post World War II monetary system caused a recession across the world. In fact the International Monetary Fund (IMF), one of the main so-called "regulators" of the world capitalist market goes even further in its latest "World Economic Outlook" report, by portraying today's crisis as "the largest financial shock since the Great Depression".
But what is probably the most important lesson of this crisis from the point of view of the labouring majority of the world population, is how much today's financial integration - an evolution which is part and parcel of capitalism itself - has reduced the size of the world, to the point where a blip in one industry, can turn into a tsunami for the whole domestic economy and, in fact, the whole planet.
When the US subprime crisis broke out last Summer, Alistair Darling promised that Britain could not possibly experience such problems, because, to use his jargon, its "economic fundamentals" were "healthy" and there was "no subprime problem in Britain". Yet, within weeks, it became clear that Northern Rock was about to go bust.
From then onwards, despite the concerted intervention of the world's central banks, the cost of credit increased. Only the biggest and most solid companies were able to carry on borrowing as before on the money markets. Other companies were faced with the choice between allowing profit margins to be dented by higher borrowing rates or reducing their activities to cut their indebtedness. Those which could pass on the increased cost of credit to customers chose the first option. Those who could not, chose the second one and, over time, a growing number went to the wall. So, in the first quarter of this year, twice as many companies filed for bankruptcy in Britain, than in the first quarter of 2007. Meanwhile, one after the other, the big banks had to write off the piles of worthless papers they had accumulated in the days when the US housing market was booming.
Britain's home-made housing bubble was hit head on. Lenders withdrew cheap mortgages, while increasing the rates and down payment levels. Remortgaging became hard to obtain and expensive. Tenants were not protected either, as by-to-let landlords increased rents in proportion to their mortgage bills and "social landlords" increased them in proportion to the interest they paid on their borrowing. This trend is still only in its early days, but it is bound to gather momentum as the housing market profiteers seek to maintain the same level of profits out of a more sluggish market.
It did not take long for the production sphere to be affected. Construction was hit first. In the first quarter of this year, the number of new house starts reached its lowest level since 1996, down by 24% from last year. Commercial buildings were affected too as companies shelved expansion plans. As a result, construction giants announced plans to cut jobs, with 300 already going at Redrow, 600 at Taylor Wimpey and up to 5,000 at Barratt, among others. An unknown number of jobs also disappeared among small building contractors.
But there is more to come. Thousands of jobs are under threat in the City and financial sphere, starting with the now nationalised Northern Rock. Here and there, more redundancy plans are announced by companies in many different industries. Whether this is because these companies are really hurt by the credit crunch or because they see the crisis as a credible pretext for yet another cost-cutting operation is, of course, another question.
Workers are already paying for the crisis
These job cuts are now showing in the government's own jobless figures and given their gross underestimation of real joblessness, this means that the damage to jobs is already significant. Brown may boast about record number of people in "employment". But the truth is that the numbers of those in real jobs is shrinking faster than before, while the number of those without any job at all is increasing.
The credit crunch does not affect just jobs and housing, but also the use of credit cards by working class families as their main source of cash for day-to-day shopping. Indeed, most lenders have increased their already exorbitant interest rates by 1 or 2%. But, in addition, they are now trying to get rid of the worse off. So the number of rejected applications for new cards increased by 20% over the 12 months up to April, with 3.4 million adults not being considered credit worthy by credit card lenders.
Predictably, high street sales have already dropped significantly, in particular sales of household goods and, more ominously, food. Yes, even in rich countries like Britain and the US, the population - that is mostly the working class - is reducing expenditure on food for lack of cash! But shortage of personal credit is not the main reason for falling sales. These are primarily the result of a sharp increase in prices for just about every basic product people use on a day-to-day basis - something which seems to be affecting the whole planet. Here, significantly enough these price hikes do not seem to impact on the official inflation index which is used by the bosses to set annual wage increases! Nevertheless, massaging of such statistics cannot conceal reality and it is obvious that prices have been rocketing.
In Britain, the price of basic foodstuffs has been increasing over the past year - but more specifically over the last 6 months. Wheat and other grain-based products, as well as dairy products, have gone up in price the most. In fact pasta, for instance, has doubled in price. But almost all foods, including vegetables and fruit, have been getting more expensive.
According to one internet site, which compares supermarket checkout prices, the cost of a basket of basic edible goods has increased by 15% over the past 12 months. Another such site says that the average family - whatever that may be - has seen its grocery bill go up by 20% in the same period.
As the Guardian newspaper reported on 17th May, if one looks at the actual prices of some basic food items, price rises are a lot higher. To demonstrate this, they looked at price differences between September 2006 and May 2008. Eggs had gone up by over 59% in all of the three biggest supermarkets (Asda, Tesco and Sainsbury's). The increase for dried fusilli pasta varied between 116% in Asda and 154% in Tesco. Hovis sliced bread went up by 32% in all 3 stores, while basmati rice went up by 61%. Organic semi-skimmed milk had gone up by 21% in Sainsbury's, while chicken went up by between 7% in Asda and 25% in Sainsbury's. But while Sainsbury's had slapped on some of the biggest price increases, its boss, Justin King told the Guardian that the food going through its checkouts costs only about 2% more than it did a year ago! Obviously he is not very good at arithmetic.
The US provides similar examples. Comparing March 2007 and March 2008, eggs went up by 35%, a loaf of white bread by 16%, and mince meat by 8%. Milk was up by 23%. In 2008 food prices are expected to rise another 4-5%. It is estimated that, in the world's richest country, a record number of people (28 million or 9% of the population) will have to claim welfare "food stamps". This is a small subsidy paid for food to individuals and members of families on very low income. In a heavily working-class state like Michigan, one in eight people are already on food stamps, and this had doubled since 2000.
In addition to paying over double for some basic foods, working class families are faced with constantly rising fuel bills - for both gas and electricity and petrol and diesel. And in the case of petrol and diesel, this rise at present, is almost on a daily basis! Petrol and diesel prices have gone up by 20% in 12 months already. But this week diesel jumped to £1.24 per litre and unleaded petrol to £1.13 per litre. The fact that 80% of this still remains as taxes is providing ammunition to a campaign by truck drivers and taxi drivers who intend to blockade Central London in protest against the cost of fuel.
These increases in petrol and diesel are also being used as a pretext to increase the price of staple foods, but also of all other consumer goods. What is more, public transport costs are increased too. So the general effect is amplified since society relies on the physical movement of people and things in order to function properly in the first place! The effect of these price hikes are however disproportionately felt by the poorer workers, many of whom must rely on their cars to get to and from work, because they live out of range of public transport, work night shifts, or just cannot afford the high cost of season tickets for trains and buses.
This rise of the cost of living began several years ago with rises of fuel and petrol prices. But the price inflation of the past year, which has now spread to many different basic products, is of a different nature, in that it is an integral part of the same financial crisis which has led to the credit crunch. Even before the full impact of this crisis is felt, whether in the form of rising unemployment or austerity measures and attacks against workers' wages, this inflation is one of the ways through which the capitalist minority is already trying to make the labouring majority pay for its crisis.
Social catastrophe in the poor countries
In the rich countries, this crisis may well lead to high unemployment and a brutal reduction in the standard of living of the working class. It may even generate an explosion of homelessness and unacceptable hardship, particularly for the unemployed. The re-emergence of something similar to the American "Hoovervilles" of the 1930s - i.e. villages of tents set up in empty suburban areas by homeless working class families - cannot be dismissed either. However, given the Western countries' wealth, this crisis is unlikely to be a life-threatening disaster on any significant scale - at least, not as long as it does not have catastrophic political consequences such as the rise of fascism out of the despair caused by the Great Depression in Germany, in the 1930s.
In the poor countries, where a large part, if not a majority of the population, has to survive on 50p or even £1 a day, the problem is posed in completely different terms. When governments are already too indebted to pay their teachers and civil servants or to finance adequate medical facilities, a sudden tightening of credit amounts to certain bankruptcy. When, in addition, these governments are under the control of corrupted politicians who owe their positions to the rich capitalist companies which loot the resources of their countries, they are not likely to be too bothered by the hardship faced by their populations.
And in many poor countries, particularly in Africa and south Asia, the sharp increase of food prices over the past year simply means the difference between survival or death by starvation. Hence the explosions of anger and despair which have taken place in several African countries, in Haiti, Central America and south Asia.
But probably the best way of illustrating these explosions and the despair of poor population of these countries, is to give here the translated versions of a few extracts borrowed from the monthly papers of the comrades of our international tendency who are active in Haiti and Africa.
Burkina-Faso is a former French colony in West Africa, which is bordered by Ghana, Ivory Coast, Mali and Niger, among others. Having no access to the sea, it is even poorer than most of its neighbours and its has been one of the worst hit in Sub-Saharan Africa. This is what the French-language Trotskyist African monthly "Power to the workers" had to say about the situation there in its March issue, following an explosion of anger in the capital Ouagadougou and in the country's second largest town, Bobo Dioulasso:
In fact, for a long time, the anger had only been waiting for a spark. It came from the government itself, when it decided to increase by 200 or 300% some of the endless number of taxes (..) imposed on those who barely manage to survive as street peddlers - and there are many such people, especially in these difficult times. This was the straw that broke the camel's back.
The population has had enough of taking lying down these on-going price increases of maize, rice, oil, soap, motorbike fuel, etc... which reach levels far beyond the meagre resources of the vast majority. For instance a hard day's work at the factory is paid 1,200 Francs per day. But finding such a job is difficult. Sugar cane cutters are on piece-rate. No work, no pay. After starting work at sunrise and working like a convict for the whole day, this worker may manage to earn 1,000 Francs, that is, if he is strong enough. Sellers of bundles of wood will have to cycle 12 to 15 miles out of town in order to find the wood, to earn a mere 500 to 750 Francs. A farmer's housewife who goes to sell a basket of mangoes and cabbages at the nearest town market will have to walk 14 to 20 miles with her baby on her back, only to earn maybe 500 Francs. A young hairdresser will get 500 Francs for a day's work. And a cattle farmer will make the same kind of money.
The government claims that the bag of 100 kilograms of maze, which is the staple food of a large part of the population, is sold for a set price of 11,000 Francs. However, not only is this is a lie, because in some parts of the country, it costs 15 or even 16,000 Francs, but in addition, who can afford to buy a whole bag? People buy maze in small quantities at a time, depending on what they can afford. And eventually the cost of the full bag turns out to be much higher. Likewise for rice. The 50 kilograms bag, which was sold for 11 or 12,000 Francs, costs now more than 13,000 Francs. There again, if you cannot afford to buy a whole bag you pay a lot more. Soap, which used to cost 200 Francs, sells now for 350 or 400 Francs. The bottle of 0.9 litre of oil jumped from 750 Francs to 1,100 Francs. The kilogram of milk powder went up from 1,000 Francs to 3,000 Francs.
Those who are poor and are unfortunate enough to become sick, cannot even afford a single box of 12 pills of paracetamol, which costs 1,600 Francs, not even after a hard day's work. Even the school teacher can't because he earns 35,000 Francs per month (just over 1,200 Francs a day).(...)
Faced with this reality people cried: Enough! The government first resorted to force by killing at least two demonstrators in Bobo and arresting several others. But this did not prevent the anger from developing and spreading to other towns. As it was worried that the anger might reach the capital, the government changed its attitude. It announced that import duties on staple products such as rice would be suspended for 3 months. But these derisory measures did not prevent the protest from reaching the capital on the very next day.
In the following issue of the same journal, our African comrades describe the general strike which came out of this wave of anger:
Many unions called public and private sector workers out on a 48h general strike due on 8 and 9 April, putting forward a series of demands among which the main one is a 25% general wage increase. Even though such an increase would still be derisory considering the present level of the cost of living, the workers will only impose it if they succeed in making themselves really feared by the wealthy and their political representatives in office.
The crisis has been just as deep in Haiti, as the Trotskyist monthly "Workers' Voice" reported in its February issue:
This month, the high cost of living - caused mainly by the exponential price increases of basic products, by 20 to 60% - has come under the media spot light. The situation is so alarming that the Prime Minister was summoned by the Senate to explain the measures he intends to take against this on-going increase in the cost of living. However, while politicians, parliamentarians and other servants of the wealthy just talk about this situation, it implies terrible hardships for the poor classes.
In addition to price hikes for both goods and services alike, massive job cuts are taking place in the industrial zone as well as in the public sector - like in TELECO [the telephone company] - this, in a country which is already plagued by unemployment.(..)
With the minimum daily wage of 70 gourdes [£1.12], a worker cannot even buy a 'marmite' of rice [6 pounds] which is sold for 100 gourdes [£1.60]. The poor families' purchasing power has been crushed and they live in hunger.
By April, the anger boiled over in the country's streets. "Workers' Voice" had this take of the events:
Since the beginning of April, the demonstrations of anger against the high cost of living are on the forefront of the news. With the sharp price rises, Haiti's owning classes, with the complicity of their servants in government, are brutally pushing thousands of poor families into starvation and slow death.
At the end of March, in just one week, the basic staple food, the cheapest type of rice, increased from 25 gourdes [40p] for a small 'marmite' [1 pound] to 35-40 gourdes [56-64p]. Other basic products such as flour and oil, followed the same trend over the same period. Consumers complain that bread is becoming increasingly small and hollow.
In several parts of the country, and more specifically in the capital, Port-au-Prince, some poor families have no other option than to eat mud cakes with salt and butter, in order to fight hunger. They only cook on Sunday, for the kids, because the prices of basic products have become so high that they are beyond the reach of the poorest layers, who have no purchasing power. The price of petrol has increased three times in less than 2 months and this is not to mention the fraudulent fiddles on petrol stations' counters. The daily minimum wage of 70 gourdes, which was set to that level in 2003, is just about enough to cover the cost of the two daily meals of a worker of the industrial zone. So what about the majority of the population which has to survive without a wage! This is enough! (...)
It all started on 3 April in Cayes, the administrative centre of the south district and 3rd largest town of the country. Thousands of demonstrators flooded the streets to protest against the cost of living and the hunger that hit increasingly the poor layers of the population. The main municipalities surrounding Cayes joined in the movement which began to spread, although with less intensity, to some other towns such as Gonaïves, St Marc, Petit-Goäve, Ouanaminthe. But it was in Port-au-Prince, the capital, that the mobilisation was particularly important, starting from 7 April, with four days of demonstrations in a row, involving some violent events, hunger riots and confrontations with the Minustah [the UN military mission in Haiti] in some parts of the capital.
For a whole week, nothing ran in the capital - schools, shops, banks, public services. Thousands of demonstrators flowed out of working class districts to join the tide of anger which was expressing itself on the Champ-de-Mars. On 8 April, groups of protesters tried to demolish the main gate of the National Palace, in order to break into the Presidential residence. They said they wanted to invite the president to join the demonstration. Indeed, in an interview conducted last December, he had declared to a journalist, with some irony in his voice, that he was also hit by the high the cost of living and was waiting for an invitation to take part in demonstrations against it."
The Haitian political establishment seems to have been taken by surprise by this anger. In any case it felt it had to yield some ground as our comrades describe:
The size of the demonstrations was such, particularly in Port-au-Prince, that the Boulos family, which owns the country's largest chain of supermarkets - including 4 separate units - was forced to decide hastily to reduce the prices of some basic products by 20 to 35%, in order to avoid falling foul of the protesters' anger. The Prime Minister, who had been claiming in his 9 April speech, that the government could not force prices down, was forced to make a U-turn two days later by announcing a 15% cut on the price of imported rice. The Senate, which had been already stained by all sorts of political scandals, panicked in front of the pressure of the street and, in attempt to revamp its credit, rushed to sack the Prime Minister through a vote of no-confidence.
Explaining away the food price crisis
The food price crisis is, in fact, part of a wider price boom which has been affecting most commodities, from metals to meat and agricultural products as well as, of course, oil and natural gas. This price explosion has been going on for some years already, which is why, for instance, food riots took place in several poor countries like Egypt and Tunisia, for instance, long before the present financial crisis broke out. However the escalation in food and energy prices has become significantly worse since the last quarter of last year, with the consequences that have been already outlined.
The official experts of the system's international bodies, such as the IMF and World Bank, offer a whole range of explanations for this aggravation, which are often repeated by the media. If only for this reason, it is worth examining whether these explanations are of any use to understand what is really happening.
In one way or another, these explanations are based on the idea that there is some sort of shortage of food (and more generally, of most commodities, such as oil), thereby justifying the ever increasing prices. This shortage is then blamed on various "culprits", including the weather and therefore climate change, the growth in the world population, the growth of the biofuel industry which is diverting edible crops, a fall in agricultural production in the poor countries and an increase in demand for food in the two new giant economies as they call them - China and India.
Last year's droughts in Canada, parts of Europe and Australia were blamed by some on climate change. And the explosion of wheat prices was blamed on these droughts. But why should they affect wheat prices when world production is expected to increase by 14m tonnes regardless of these events, while world consumption is only expected to increase by 3m tonnes? Likewise for rice, whose price explosion was blamed by some on the severe floods in Bangladesh. However, the same heavy 2007 monsoon which washed away the rice crop in Bangladesh led to bumper harvests of rice in Indonesia and in other parts of south-east Asia. So there should, on balance have been a fall in the price of rice, not the huge increase we have seen, as there was no overall shortage on the world market. Such local factors - even on quite a large scale - can therefore not account for the sudden shooting up of the price of wheat, other grains and seeds, or rice.
So what about the growth in world population and increased consumption leading to food shortages? Didn't Brazil's President Lula say that it was due to the abolition of poverty and the poor being able to eat 3 meals a day all of a sudden, that prices were going up and what a good thing too? Quite where this sudden affluence was meant to have fallen from - maybe the sky - is not clear. The world population is 6.6 billion - and most population growth today occurs in the poorest countries - where 2 billion (in other words a third of the world's population) are estimated to be living on $1 or less a day, among whom many are suffering from malnutrition and are eligible for food aid. This is hardly a recipe for an increase in consumption - and certainly not on a scale to cause food shortages on the world market!
That agricultural production has fallen in a number of areas is certainly true. In fact, it is particularly true in the poorest countries, where local production has sometimes been completely wiped out because it cannot compete with the low prices of subsidised imported food dumped there by the rich countries. Even not-so-poor countries have suffered from, like South Korea whose rice production was almost entirely replaced by rice imports from the USA in the 1980s and 1990s, leaving Korean farmers to face bankruptcy at the time. But this has been an on-going process over the decades and certainly cannot explain the explosion of food prices. However, it does explain the catastrophic consequences of these price rises in poor countries whose local staple food farmers were pushed out of business in the past by cheap imports.
The rise in the price of fuel has also been blamed for the explosion in food prices, since it increases the cost of transportation. But of course the rise in the fuel price is part of the same phenomenon. Besides, transportation cost is only a small part in the production cost of wheat or rice.
So what about biofuels? Has the diversion of grain, sugar and some oil seeds to the production of ethanol and biodiesel caused the price of these foodstuffs to shoot up? In fact, most of the grain used for biofuels, appears to have been grown in addition to existing crop, for the purpose of cashing in on the biofuel subsidies offered by the US and EU governments. So if anything, there are more cereal crops and oil seeds being produced than ever in these parts of the world and this should not cause any shortage. There would probably have been a great surplus this year had it not been for the drought in the developed world. As to price increases being due to biofuel crops becoming the latest fad, it must be noted that the prices of these crops suddenly started to increase either in the last quarter of 2007 or the first quarter of 2008. Why so recently, when the industrial use of these crops for biofuels already goes back 2 or 3 years? Besides, the most spectacular price rise among all food affects rice - up fourfold for some varieties. However, rice is not used for biofuels.
Finally, can it be true to say that commodity price rises are due to increased consumption by the populations - and by the industries - of China and India? The facts tell a different story. China and India are both net exporters of grain even if they import oil seeds - but still far less than the EU. China's agricultural trade balance was in surplus by $6.9bn in 2006 and remains in surplus up until today. India is also a net exporter of agricultural products - and cereals, including rice, account for 20% of exports. Due in part to cultural and religious habits which exclude the eating of meat, it is also a net exporter of meat and dairy products. So, not only is it at best stupid to claim that China and India are in any way responsible for the food price crisis, but it is conveniently forgetting that in China alone, 150m to 200m people are suffering from undernourishment! Claims that China is guzzling the world's crude oil are just as stupid. China's oil consumption is projected to be 8m barrels per day this year, compared to 49.3m barrels/d for the OECD as a whole, of which 25.5 m b/d is consumed by the US alone. If the size of the populations are taken into account, this means that for every 1 gallon of oil used by the average Chinese, 7 are used by the average OECD inhabitant and 14 by the average US citizen! Even though it does import oil, China has indeed a very long way to go before it can be accused of taking oil away from the rich countries!
To sum up, among the possible factors in the commodity and food price boom outlined above, some are clearly irrelevant. Others may have played some role, but at most a very limited one. Obviously, however, the main reason for officialdom to resort to explanations based on these factors is that it makes it possible to explain away the present criminal chaos without having to blame it on the capitalist system itself.
Instead the food price crisis is said to be due to bad management in an otherwise healthy market, which could be fixed by making a few adjustments - what the experts call "improving governance". Or else it is described as some sort of temporary glitch, admittedly a major one, but which will resolve itself eventually - in short, a simple "correction" as the above-mentioned Jean-Claude Trichet declared. The truth, however, is somewhat different.
The bingo economy takes its toll
Some institutions go out of their way to try and minimize the commodity price boom. For instance, the already mentioned IMF "World Economic Outlook" report points out that in real terms - that is, taking into account the depreciation of the dollar against other currencies - "prices of most commodities remain well below their highs in the 1970s and early 1980s, with those of crude oil, lead and nickel being the main exceptions." Maybe so, but such statistical evidence, in and of itself, does not seem enough to fill stomachs in the poor countries! In fact, what it would only show, assuming the IMF's calculations are correct, is that the purchasing power of the poor countries has gone down drastically since the 1970s!
In any case, the IMF's own figures recognise that real prices of non-fuel commodities have doubled over the 2002/07 period, which may be less than their 122% increase in dollar terms, but is still unbearable for those who are at the bottom of the social ladder in this capitalist world.
So what is the main engine of this price boom? All evidence points to one particular gang of criminals - financial speculators, just like for the housing and credit bubble of the past years. Of course, there is no reference to this in the IMF's report. It barely mentions in passing the existence of markets where oil contracts are traded, and only to predict that, on the basis of these current market trends, the price of a barrel will soon go down, well below the $100 level. However, on 20 May, barely a month after this IMF report came out, the price of a barrel of oil crashed through the $130 barrier. So much for the IMF's crystal ball!
Mind you, so-called "financial experts" are not much better at explaining price variations even after they happen. For instance, on the day after the oil price went past the $130 level, the Financial Times explained this sudden jump by the fact that "nervousness about Chinese energy demand was exacerbated when officials said that 32 power plants had been forced to close because of shortage of coal". Apparently the Financial Times thought that oil traders were so ignorant as to believe that oil could simply replace coal in China's power plants!
The responsibility of financial speculation in the food price boom has been widely exposed in the US media, including in articles published in mainstream pro-business papers such as the New York Times and Washington Post. As a result, the Commodity Futures Trading Commission (CFTC), the US commodity market regulator, was summoned to testify in front of a committee of the US House of Representatives, on 15 May this year. Predictably, since CFTC members are very close to commodity market traders and big financial operators, its testimony was aimed at demonstrating that speculation had no responsibility in the price boom.
But in doing so, the CFTC shot itself in the foot. In a nutshell, its "demonstration" hinges on the idea that "simply stated, there is no evidence that position changes by speculators precede price changes". This is the old chicken and egg problem - is it price changes that trigger speculation or speculation that triggers price changes? Obviously both. But not so for the author of this testimony who begins his long "demonstration" with this remarkable statement: "when new information reaches the market (..) prices respond". Of course, anyone who considers that prices can respond to information, having apparently their own free will, would blame the boom on prices themselves rather than on poor speculators who only respond to their movements!
However, speculators do have a responsibility in the price boom. As a respected columnist noted in the Washington Post on 30 April, "Speculators have always played a prominent role in commodity markets, but in the past year, they have literally overwhelmed them, causing a dramatic increase in trading volume, volatility and prices and disrupting many of the normal relationships between producers and end-users. Many of these were the same hedge funds and hot-money investors who had gorged on (..) tech and telecom stocks, subprime mortgages and commercial real estate and now needed a new thing to focus on. Others (..) looked to commodities as a hedge against the falling dollar. But perhaps the biggest push came from pension funds (..) whose managers had all gone to the same conferences and read the same academic papers, suggesting that a basket of commodity futures would provide a good hedge against stock and bond market declines."
In fact, a first wave of speculative funds began to flood the commodity markets from the beginning of 2000, when some fund managers started to fear a possible collapse of the dotcom speculative bubble on stock markets, while a parallel wave invaded the debt markets. Knowing that around £3,000 billion worth of paper money disappeared into thin air in the "dotcom crash", the wave of capital fleeing the stock markets was obviously huge. For both the debt and commodity markets, this led to the development of speculative bubbles. The housing mortgage end of the credit bubble is now in the process of bursting and commercial debt is threatening to follow. But the commodity bubble is still growing, and for some commodities, at a fast rate, as the case of oil shows.
Flashback on commodity markets
It may be difficult to imagine how the profit sharks can manage to wreak havoc on commodity markets and, especially, on food markets. This is simply due to the very principle on which these markets are based - which is, itself, a by-product of the blind operation of the capitalist system. Like all producers under capitalism, farmers organise their production, not according to known needs, but for a market about which they know virtually nothing. But, in addition, they are dependent on factors over which they have no control - the weather, insects, crop and cattle diseases, etc.. The same can be said of the producers who come after the farmer in the food processing chain, be it mill owners for wheat, refinery owners for sugar cane and beet, etc.. They work for an unknown market and, in addition, their supply is subject to the same elements of uncertainty as the farmers' production.
In the 1860s, in the US, these factors of uncertainty gave birth to the idea of creating a system which would allow farmers and food processors to insure themselves against the risk of price changes. Chicago's so-called "commodity futures market" was born. It was soon to be followed by similar exchanges in Kansas City, Minneapolis and New York. Europe followed later, although in a more limited way, focusing mainly on mineral exchanges operating along similar lines.
Without going into technicalities, the operation of these futures markets is comparable to that of stock markets, in that they bring together commodity producers and buyers needing funds to insure themselves against changes in prices, and capitalists looking for ways of using their cash to make a profit. The difference, however, is that the so-called "futures" and "options" traded in these markets represent a set number of barrels of oil, bushels of wheat or corn, tons or rice, etc... due to be bought or delivered at a set price and on a set day. However, the oil, wheat, corn or rice referred to in these contracts has no existence in the real world during their lifetime - which can be anything from a few months in the case of wheat, to several years in the case of oil. Even when they come to an end, in 98% or so of cases, these contracts do not result in the delivery of physical goods.
Nevertheless, capitalist economists claim that these artificial markets can provide both the protection that producers need and a simulation of the real economy which is accurate enough to ensure that futures' prices reflect the real market price for each commodity - i.e. the balance between real supply and demand. In "normal" times, this is more or less what happens. Or to be more precise, at any one time, the so-called "spot price", that is the price paid for the immediate delivery of a commodity, tends to be very close to the price of future contracts which are due at the same time.
However "normal" times have been scarce over the past decades due to the fact that the volume of floating capital in search of a quick buck has been consistently huge since the early 1970s. An excess of such capital in any market generates speculative bubbles which pushes prices to artificial highs. This is true just as much for commodity markets. Speculation can result in future prices increasing way beyond the real spot price, thereby creating a distortion which can be used by traders to manipulate the market.
Crude oil is a good example of this con. The headline price which is always quoted by the media is that of oil futures, and not just any oil futures, but those with the longest lifetime, which are usually the most expensive. For instance, the $139 oil future which made the front page of the Financial Times on 21st May was due for delivery in 2016! The same article referred to "spot prices" reaching $129. But in fact this was a crude lie (no pun!). In fact, the real spot prices used in the small world of oil majors, oil traders and wholesale buyers are covered by "commercial confidentiality" and no-one knows what they are. As a result, to estimate these "spot prices", journalists use the price of an oil future reaching the end of its lifetime. But this may be very misleading.
In addition, there are many ways in which commodity markets can be manipulated by big players, provided a small number of them control collectively a large part of the market - which is more or less the case for most commodities. One example of such manipulation came to be known as the "Great Salad Oil Swindle", back in 1963. Tino De Angelis, owner of the Allied Crude Vegetable Oil Refining Corporation was indicted for using phony warehouse soya bean oil receipts as collateral for his trading on food futures. One of his techniques was to cover big tanks of water with a thin layer of soya bean oil. He was discovered when he tried to force the price of soya bean futures to a record high through unprecedented buying, causing 16 companies to go bust, including a subsidiary of American Express.
From the commodity bubble to the food price boom
One decisive factor which boosted both speculation and market manipulation was new US legislation whose implementation was completed in 2000. What this did, was to open commodity markets to the newest kinds of gambling invented for the benefit of the broader financial markets. So, the very same kind of "derivative" products which were behind one financial disaster after another in the 1980s and 1990s, became the norm in commodity markets. There was no longer any pretence that commodity markets were designed to facilitate the trade of commodities. Commodity markets became fully integrated into the financial sphere. By the same token, the deregulation that had been introduced in financial markets in the 1980s was extended to commodity markets in the 1990s. This did not mean that regulation disappeared, of course. It just meant that just about anybody was now able to join the commodity market honey pot.
It was this "commodity Big Bang" which really opened the gates to billions of pounds worth of speculative money, which had fled the stock market following the dotcom crash. Speculative funds of all sorts, including the famous hedge funds, flocked into commodity markets. While the broader US Standard & Poor 500-stock index was losing 49%, between March 2000 and Oct 2002, commodity futures' prices increased by over 6% - not much, but this felt like a haven of prosperity in the general debacle. And this was only the beginning. Between 2003 and 2006, while the Standard & Poor rose again by 56%, commodity prices increased by an average 129%.
By 2006, already, some financial analysts were warning against the growing risk of volatility on commodity markets. However, this did not prevent an average $100 million worth of speculative money from entering the commodity futures markets of the rich countries every day. By the beginning of 2007 the profits were already huge. Axioms Opportunities Fund, a hedge fund specialising in commodity speculation, valued at $60bn, managed to return 14% on investment for its customers during the first half of the year alone, compared to an average 7% for non-commodity hedge funds over the same period.
This was risky business, however, as well as a crooks' paradise. In September 2006, Amaranth, a large hedge fund, lost a massive gamble on gas futures and went to the wall, leaving $6.5bn of debt. Its managers were later investigated by the commodity regulator under suspicion of having attempted to manipulate the gas market. Amaranth was not the only operator caught with its hands in the commodity pie. Enron's directors had already been investigated for similar reasons, among many others, following the collapse of the company, in 2003. More recently, in October 2007, the very British BP had no option but to agree to a $313m fine as compensation for its manipulation of the US propane market.
Some were beginning to find the turmoil on commodity markets and its consequences increasingly worrying. In June 2006, a US Senate committee published a report entitled "The role of market speculation in rising oil and gas prices". Among its findings was the estimate that out of the $60 price of oil futures at the time, $25 was to be blamed on speculation only. Accurate or not, this estimate provided at least an idea of the influence of speculation over the price of oil. The report also noted that, by then, the two largest single players on the US energy market were no longer energy producers or buyers, but two investment banks - Goldmann Sachs and Morgan Stanley. It might have noted - but did not - that the oil majors were no stranger to what was happening. After all if, at the time, Shell was paying 240 traders to operate on its behalf on commodity markets (and its rivals certainly did at least as much) it was certainly not to push oil prices downwards!
Then came the credit crisis. In March 2007, the fact that two of the US largest subprime lenders found themselves in deep trouble prompted a number of capitalists and investment funds to get out of the debt and money markets and to migrate towards commodity markets. Less than a year later, this February, it was estimated that as much as $1bn a day was entering the commodity markets in the US. In the Chicago commodity exchange, trading volumes increased by 25% during the first three months of this year while the involvement of speculative hedge funds reached $55bn - 200% more than in 2006. The US bank JP Morgan worked out that the total amount of new money which had flocked into commodity markets in the six months up to March this year could be anywhere between $150 to $270 billions. And this was only the visible tip of the iceberg - the regulated part of commodity markets.
Indeed, far more futures contracts are traded directly, outside the framework of the regulated markets, using private electronic trading systems. In the trade's jargon, such contracts are described as OTC - meaning "over the counter". By April 2008, the Bank of International Settlements, the world banking regulator, estimated that the total value of these commodity OTC contracts represented the bewildering sum of $8,000 bn - 166% more than in 2005 and 14 times more than a decade earlier. Of course, such figures bear no relation with the underlying commodities they pretend to represent - indeed it would take many years for the planet to produce commodities worth that sort of money. But this is precisely where the purely speculative nature of these markets lies. However, in so far as trading in both regulated and OTC contracts can and do influence real prices, this speculative frenzy does have an impact in the real world.
In this mad rush for commodity profits, food is not quite as valued as energy, but is nevertheless in a good position on the speculators' agenda. It is no coincidence if, in just one day, on 31st March, the price of rice jumped by 31%, just after four producing countries announced that they were banning rice exports. Only large-scale speculation - betting on a price increase - could have achieved such a result. In fact, respectable banks such as HBOS have no qualms about being seen to take advantage of this bounty. Through its Dutch affiliate, part of the former ABN Amro bank, HBOS has won a big position on the Chicago commodity market. Following India's ban on exports of rice, ABN Amro issued a prospectus inviting speculators to join in, saying, "now, it is possible for the first time to have a share in the number one foodstuff in Asia." Apparently, those responding to this were able to cash in a 20% return on investment in the space of three weeks - a period which saw an unprecedented increase in speculation on rice futures in Chicago and other major centres, together, of course, with a huge price rise.
Of course, while the speculators push the price of food futures through the roof, the big traders and food processing companies push real prices even further for consumer. Never mind if this means deaths by the thousands at the end of the chain!
Profiteering from hunger
In a way, we are meant to see today's financial crisis as an exceptional set of circumstances, which is part of a so-called "game" where there are winners and losers, as is always the case in this society. No-one can dispute this, except for four important points. One, this "game" would be better described as the lottery of capitalist profiteering. Two, this lottery wreaks havoc in the lives of billions of people by leaving a devastating trail of destruction in its way. Three, the winners are always the same people - a tiny layer of capitalists - and the losers are also always the same - the majority of poor and working masses. And four, every player in this "game" should be held responsible for his profiteering and its consequences.
Because, what the food price boom illustrates is the criminal irresponsibility of a capitalist class which is quite willing to take the risk of causing damage worse than a war among the population of the poor countries, for the sole purpose of piling up more millions for themselves and their shareholders. And such people are criminals. But who are they?
Agribusiness cashes in
While the poor starve because of the food price rises, the companies which have controlling shares in the market are making record profits, of course.
In the three months up to February this year, two of the world's largest agribusiness companies, Monsanto and Cargill, reported net incomes which had more than doubled compared to the same period a year ago. Archer Daniels Midland, the US 3rd largest foodstuff trader posted a 16-fold jump in the operating profits of its grain merchandising operations during the same 3 months.
Quite obviously, these sharks have found a way of getting very fat on ever-rising prices - despite the fact that, as buyers of commodities, they should be losing out due to price increases which disrupt the operation of futures markets. And if they are not only not losing, but actually making more out of this situation, it can only be for one or a combination of two reasons: they may be passing on the price increases with a large premium to their customers (which is certainly the case for petrol or pasta, for instance); or they may be involved on a very large scale in the betting on rising prices.
Although Monsanto and Cargill are involved in food trading, their core business has more to do with fertilizers, seeds, and other products which are necessary for modern, large-scale agriculture. It is not clear from their accounts whether they increased their profits on their core business as well - although the food price increase should not be a reason for this to happen. However, Mosaic, one of the world's biggest fertiliser companies, which specialises only in this field, reported a 12-fold increase in profits for the three months up to February. In other words, even fertilizer manufacturers manage to make a killing out of the food price boom, when, on the contrary, they should be in trouble due to the increase in the price of raw materials necessary for the manufacture of fertilizers. But they are not. Obviously they even manage to increase their profit margins considerably, on more expensive fertilizer, which, in turn, can only contribute to increasing the real food production costs on the farms, thereby fuelling the price boom even more!
Among the heavyweights of agribusiness, some are rather shadowy. In fact, they are names that most people have never heard of, but who, nevertheless, rule over the lives of tens of millions due to their trading empires. In 2005, in an article exposing the effect of subsidised US cotton dumping on the economy of the African country of Mali, the website CorpWatch said: "Meet Gerard Louis-Dreyfus, a 73 year old Frenchman, who (..) owns a somewhat obscure company named after his family, which in turn owns Allenberg Cotton(..). In 2004, the United States government paid Allenburg $34 million in subsidies for his cotton crop; the total over the last ten years topped $186 million. Louis-Dreyfus is not a poor farmer. Forbes magazine estimated his 2005 net worth at $3.2 billion(..). The Louis-Dreyfus Group has an annual turnover of over $22 billion, more than four times the gross domestic product of the entire country of Mali, population 12.3 million. By contrast, not only do Mali's poor farmers get little for their labour, but many small US farmers are also unable to make ends meet and are being driven out of business at the rate of 330 farms every week, among them many of small cotton farmers, some of whom are forced to sell their crops at roughly half their cost of production. Meanwhile, (..) Allenburg Cotton's domestic sales topped 3 million bales of cotton last year. The company is privately held so exact profits or losses are not disclosed."
This Louis-Dreyfus empire operates in 53 countries and holds dominant positions in part of South America, Sub-Saharan Africa and China. It is one of a handful of very big players in world commodity trading, usually dating back to the 19th century, whose operations are as opaque as they are all powerful as market setters. And it would not be surprising if such companies, together with the Monsantos and Cargills of this world, were acting behind the scenes to use their joint monopoly position and financial clout, to manipulate commodity markets in a way that suit them - just as the oil "majors" do as a matter of course!
The energy majors are overheating
In Britain, long before the explosion in food prices, the so-called "Big Six" energy companies were already among the main beneficiaries of the commodity market boom, thanks to their quasi-monopolies. Together they control 55% of the gas and electricity markets and they set the benchmark.
The first very big energy price increases began in 2003/4. There were three serial hikes which took gas and electricity up by 18%. In 2005, gas and electricity went up by another 12-15% on average. Then in 2006 came the largest historic rise ever seen - when British Gas-Centrica put both gas and electricity up by 22% in February and then by another 12.4% for gas and 9.4% for electricity 5 months later. Of course the other companies followed, with matching price hikes soon after. On average, gas bills rose by 37% in the year, even though wholesale gas prices were actually falling by 50%!
Then at the beginning of 2007, British Gas announced a cut in the price of gas and electricity of 17% and 11% respectively. This was the first cut in price since 2000. It was followed by another cut of 6% for electricity and 3% for gas in April. Of course this never made up for the 37% rise of the previous year and even then it was too good to last. In January this year, British Gas announced that both electricity and gas would have to go up by 15%. And of course the other 5 players have followed hot on their heels with similar price hikes. Npower has become the most expensive in the market with an increase of 17.2% for gas, so far this year. But this is not the last that households will hear of price rises for energy. British Gas has already said that it will most likely "have to" increase gas prices by another 15% before the end of this year. By then, the average gas bill will have increased by 96% since 2003!
In this context, it is hardly surprising that the number of households spending more than 10% of their income on energy bills, the so-called "fuel poor", has shot up from 1m in 2003 to 4.5m today. In passing, one might mention the fact that the government's announcement in March that the energy companies would be asked to provide a collective "donation" of £225m over the coming 3 years towards alleviating this fuel poverty, in return for avoiding a windfall tax on their scandalous profits, is nothing short of insulting. Because this "donation" would amount to no more than £16/year for each household in fuel poverty!
The profiteering of the oil companies is no big news of course. Shell and BP at the beginning of the year recorded profits of £14bn just for the first 3 months, which amounts to £3m an hour!
But this is true of Centrica as well. As the main inheritor of the old nationalised British Gas, it is a producer and a supplier of energy, so that it is betting against itself on the market and winning both ways. That does not prevent it from claiming that it has no option but to pass on the higher cost of energy to the consumer, even if it has actually pushed the price up itself! No wonder, therefore, if, in February this year, it announced a 40% increase in its operating profits to almost £2bn. Significantly, 2/3 of these profits were actually made when wholesale gas prices were falling in the first half of 2007!
The supermarkets' superprofits
The supermarkets are of course making a bumper profit out of the food price increases. Tesco, which is the largest of Britain's 4 biggest supermarket chains, with 37% of the market, is also the most profitable. In 2007 it broke its own record by increasing its pre-tax profit by more than 20% to £2.65bn - meaning that it was earning £300,000 an hour. This year its pre-tax profits were up another 5% to £2.85bn, although this was described as "less than expected".
Sainsbury's has more than made up for Tesco's very relative "slump" however, having announced a 28% rise in profits in May with 13 consecutive quarters of growth and a doubling of its profits.
And then there is the sudden surge shown by Marks and Spencer which occupies a much smaller up-market food sector. It made more than £1bn profits over the last year, its best since 1997, but because it actually predicted it would do even better, it actually cut its staff bonus by half this year!
Behind the supermarket profits, lurk the food companies like Unilever, Northern Foods, Tate and Lyle, or Dairy Crest, for instance. So how have they been cashing in on the price rises?
For the first quarter of 2008, Unilever's operating profit has gone up by 46% and its net profit by 39%, which seems quite extraordinary compared to 2007 when the increase was 5%! But then Unilever is one of the main looters of the Third World!
Northern Foods is one of the biggest food producers - making ready meals, pizza, biscuits etc., and up to now has been a main supplier of Marks and Spencers as well as all the other big supermarkets gaining 76% of its total revenue this way. However it has been in the news this month by using the pretext of the cancellation of a ready-meal contract with M&S to justify mothballing its Fenland factory in Grantham, thereby throwing 730 workers on the junk pile. Never mind the fact that Northern Foods is highly profitable, having increased its pretax profit in November 2007 by 37.7%.
Tate and Lyle - the sugar company - increased its pre-tax profits by 14% in 2007 with its food and industrial ingredients business actually increasing its operating profit by 36%! Likewise for Dairy Crest, which is the milk industry equivalent to Centrica - that is the inheritor of the old nationalised Milk Marketing Board, increased its profit before tax by over 40%.
In this context of high profits and supposedly cutthroat competition between the supermarkets it is ironical that Asda, Morrisons, Safeway, Tesco and Sainsbury's as well as the dairy processors, Arla, Dairy Crest, Lactalis Mc Lelland, the Cheese Company and Robert Wiseman, admitted to price fixing after a 3-year investigation by the Office of Fair Trading, which concluded in December 2007. They settled this out of court and paid £116m in fines in total. But as a result of their collusion over the shelf price of milk, butter and cheese, the public paid an estimated £270m in higher prices! And, of course, there is no guarantee whatsoever that such price fixing will now stop.
Making the capitalist class pay
There is a little-known publication which comes out every year in June. Its is called the "World Wealth Report" and is produced jointly by Merrill Lynch, the US investment mega-bank, and CapGemini, the French management consultancy giant. Its last edition, dated June 2007, makes an interesting read.
According to this report, there are 9.5m individuals across the world, known as HNWIs (or High Net Worth Individuals), with non-residential assets valued at $1m or more. Between them these HNWIs own $37,200 billion, which is nearly the value of everything that is produced on the planet over a year. Of this total, one third is owned by just 9,500 individuals called "Ultra-HNWIs" who own at least $30m each in non-residential assets. And one of the findings of this report is that while the wealth of HNWIs increased by 11% over the previous year, that of Ultra-HNWIs increased by 16%. This means that the share of the word's wealth controlled by the very rich is increasing rapidly. It is a well-known fact that the richer you are, the richer you get.
It is not difficult to imagine where this colossal wealth comes from. Ultimately it is the product of the labour of the planet's working population. But the way it is appropriated is clearly not through direct productive investment whose total amount has been shrinking over the past decades. No, it is through resorting to the mechanisms of the financial sphere, including commodity speculation and cashing in on higher commodity and food prices. These capitalist leeches live off the blood of the starving poor in the Third World just as much as they live off the labour of the working classes of the rich countries.
This long catalogue of examples of how well the capitalists are doing in this period of crisis should provide the proof, if any was needed, that there is no justification for the working population and the poor to foot the bill of today's crisis. For years the capitalist class has been accumulating huge profits at the expense of working people. For years they have been fiddling with their system, in order to squeeze always more out of the working class while taking as little risk as they could. So if someone should pay for this crisis, it is the capitalists and the capitalists alone. And it is the task of revolutionaries, our task, to help the working class to develop the necessary confidence in its collective strength, so that this time round, the capitalists do not get away with making the rest of society pay for a crisis for which they bear sole responsibility. This will not free society from the profiteering and greed which is the root cause of such devastating crisis. But it will be a step in this direction.