By Chris Fry
A July 28th article from the website “Business Insider” provides a succinct description of the billionaires’ solution to the spike in inflation that is devastating the living standards of the workers and oppressed:
“The best cure for high prices is high prices,” energy analysts like to say. That’s exactly what seems to be happening in the US.
Even establishing a reasonable explanation for why we face this current wave of inflation, the most severe in 40 years, while at the same time as the economy “officially” sinks into a Federal Reserve induced recession, seems to elude the most distinguished (and highly paid) bourgeois economists. A July 31st CNN report stated:
Even top economists are struggling to explain perhaps “the weirdest economy” Americans have ever lived through, CNN’s chief media correspondent Brian Stelter said on “Reliable Sources” Sunday.
Paul Krugman, a Nobel Laureate and economist and a longtime columnist for the New York Times, said the economy is not in recession, but added that the distinction doesn’t even matter.
“Jobs are abundant, although maybe the job market is weakening. Inflation is high, though maybe inflation is coming down,” Krugman said. “What does it matter whether you use the R word or not?”
One could almost excuse the “confusion” of these well-heeled gentlemen until one realizes that their primary role in a capitalist crisis like we are currently facing is to hide its true causes behind a shroud of deceptive phrases like “supply chain issues”, “too much income” (for the workers), “supply and demand” and so on and so on.
Even progressive leaders like Senators Elizabeth Warren and Bernie Sanders, who do quite correctly point to “corporate greed” and huge oil company profits, fail to provide us a complete picture, and only offer the workers and oppressed helpful reforms that might temporarily alleviate the problems instead of creating permanent solutions.
Investment banks – fortunes from derivatives
Derivatives on Wall Street are like poker chips at a casino. Essentially, they are bets on how some investment price will go up or down. They are unregulated. This quote from a June 2018 Rantt Media article gives some idea just how important derivatives are to Wall Street bankers:
How big is the derivative market today? There is really no adjective that can capture it. It is estimated at more than $1.2 quadrillion. For those of us used to dealing in hundreds and thousands, that’s an impossible number to conceive. It is said to be 10 times more than the total world gross domestic product. In other words, most of the value has little relation to anything tangible and exists only on paper.
The 2008 financial crisis that sparked the Great Recession was caused by the Wall Street investment banks like Bear Stearns, Lehman Brothers, Citigroup and Goldman Sachs and other giant firms, along with their insurer AIG and giant rating agencies in their manipulation and fraud regarding subprime loans and mortgage derivatives.
When these firms’ schemes collapsed, sparking the Great Recession, nearly four million families lost their homes to foreclosure and nearly nine million people lost their jobs. The stock market lost half its value, resulting in millions of people losing part or all of their life savings.
The federal government, under both the Bush and Obama administration, used $635 billion from the people’s treasury to bail out these investment banks. Their executives walked away with hundreds of millions in bonuses.
The Dodd-Frank law was passed in 2010 by Congress supposedly to rein in these “too big to fail” banks. One provision was to prevent them from entering into the commodities market, which includes the buying and selling of oil. All the oil futures, which determine the price at the pump, were to go through the Commodity Exchange, where buyers and sellers would openly negotiate a price.
But for the investment banks, there was too much profit involved to allow the U.S. Congress to get in the way of these derivative schemes.
Enron shows the way
In the late 1990s, the energy and financial giant Enron became a Wall Street darling, showing massive profits to stock buyers. In fact, though, they were cooking the books:
In Enron’s case, the company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though the company had not made one dime from the asset. If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer the asset to an off-the-books corporation, where the loss would go unreported. This type of accounting enabled Enron to write off unprofitable activities without hurting its bottom line.
To cope with the mounting liabilities, Andrew Fastow, a rising star who was promoted to chief financial officer (CFO) in 1998, developed a deliberate plan to show that the company was in sound financial shape despite the fact that many of its subsidiaries were losing money.
When Enron’s scheme unraveled in 2001, the company was forced into bankruptcy and several executives were given lengthy jail terms for fraud. Investment bankers responsible for the 2008 crash have escaped any such fate. And they chafe at the idea that they were precluded from entering the commodities market to place their derivative bets. The agency overseeing the Commodity Exchange, the Commodity Futures Trading Commission (CFTC), drew up a set of rules based on the Dodd Frank law. The bankers’ trade group, the International Swaps and Derivatives Association (ISDA), found a way around Dodd Frank, using the Enron example and Footnote 563 of the CFTC rules:
Edward Rosen was a derivatives lawyer with Cleary Gottlieb Steen & Hamilton. The firm had been hired by a coalition of 13 global banks to thwart the CFTC’s global ambitions.
By 2012, Wall Street’s biggest firms had been using ISDA’s boilerplate swap-guarantee forms for 20 years. But early that year, with the CFTC circulating draft policy, Rosen raised a simple question on a call with his Wall Street clients. According to Levinson, Rosen said: “What happens if you just stop guaranteeing those transactions?” That, it turned out, was the hundred-trillion-dollar question.
By March 2012, Goldman Sachs had taken Rosen’s question to heart. The firm told clients they had to sign off on Goldman moving its swaps to London, Singapore, or wherever Goldman wanted, whenever Goldman wanted. Who’s gonna argue with Goldman Sachs when all the other big firms are all pulling similar stunts?
An American citizen who lived in Greenwich, CT, and worked for a U.S. firm, could now go to their office in lower Manhattan, arrange, negotiate, and execute swaps all day long, and keep them all from the CFTC just by checking a box “assigning” the swaps to a foreign affiliate. And on top of that, a good (or bad) number of these thousands of “non-U.S.” affiliates apparently were shells, legal fictions created on paper solely to conceal the fact that their products were secretly one of the few remaining things in the world actually manufactured entirely in the U.S.A.
Inflation: Five dollars a gallon at the pump
After the Russian Federation began its intervention in Ukraine in February 2022, these Wall Street sharks dramatically increased their swap bets on oil.
If a global crash is the planet-destroying meteor of swaps, inflation is the global warming of swaps.
Wall Street dominates the swaps markets, which drive the futures markets (where Wall Street also bets), which drive the spot prices (ditto). Oil companies reap a benefit, for sure, but they couldn’t buck Wall Street if they wanted to.
These secret investment bank swap deals have amplified at the gas pump the small price increase from shortages caused by the sanctions that the U.S. has forced on Russia:
The amount of trades – and the profits associated with them – have been skyrocketing, reaching record highs in 2021 and 2022. This inadequately regulated activity is hitting Americans’ pockets and represents a “market emergency”, according to Michael Greenberger, a former US government trading regulator.
“My instinct tells me that a very careful analysis of this market would show that the price is not reflective of supply chain problems, that there’s just too much leeway for the big banks and the big producers to manipulate if no one is looking and watching what they’re doing,” says Greenberger, the former division director of the Commodity Futures Trading Commission (CFTC), the main regulator of US energy markets.
“Nobody with power is looking at what they’re doing,” he says. “There’s no cop on the beat.”
Veteran oil analyst Philip K Verleger has warned that supply and demand “fundamentals have been rendered almost irrelevant” for oil prices, a key determinant of the price of gasoline at the pump.
He has pointed to a dramatic rise in speculation driven by artificial intelligence rapidly buying and selling massive energy bets based on minor or even nonexistent changes to real-world supplies. “Under these circumstances, a change in [supply and demand] fundamentals that might have moved prices by 50¢ or $1” will cause a change of as much as $10 a barrel of oil, he has written.
Greenberger has suggested that if Biden simply announced that he was going to look into this, then that might frighten the banks over their exposure that the gas prices might go down by as much as 25 percent. And that fear might explain the small decline in gasoline prices in July.
Solution: People’s price controls
Is it right that the private owners of these banks and giant monopolies can dictate prices to the working class and the oppressed, no matter how much suffering it causes, when it is we who produce all the wealth in society?
Instead, why can’t commodity prices be set by the leaders of the communities jointly with the trade unions. We could start with a price freeze to pre-pandemic levels and go from there.
Does this sound farfetched?
In June, the inflation rate in the U.S. was 9.1 percent. In the United Kingdom it was 9.3 percent. The rate was sky high in the European Union as well.
But in China, the inflation rate in June was 2.1 percent.
In China, prices are kept under control by its government National Development and Reform Commission (NDRC). This agency has the power to dictate to both private and publicly owned companies what the prices are set at. If the company has to swallow increased production costs, so be it.
This is the real reason that Wall Street and the politicians from both parties hate the People’s Republic of China so much, why they try (and fail) to blockade China from technical advances, why they amass their fleets right up to the Chinese shores. The second most economically powerful country in the world is setting a successful example of “authoritarian” rule over banks and private business owners in favor of the working people of their country.
It’s called socialism. We should try it.