Causes of Middle East Unrest. Let’s Look West | Sheldon Motley


| by Sheldon Motley |

While some of the old elite in Egypt will be pushed out and some of the necessary reforms will be put into place, practices and policies in the West that help create poverty and then unrest in less affluent countries like Egypt will not be addressed.

In 1991, Goldman Sachs, the investment banking firm, came up with the idea of the commodity index fund.  Of course, they were not interested in obtaining the wheat or the corn, etc., they were just interested in making a lot of money.  By buying and buying and continuing to buy food commodity futures, Goldman Sachs, Bear Stearns, AIG, Lehman, Deutsche Bank, JPMorgan Chase, etc., drove the commodity futures prices up.  According to a study by the now-defunct Lehman Brothers, index fund speculation jumped from $13 billion to $260 billion from 2003 to 2008. Not surpri singly, world food prices rose in tandem, beginning in 2003.  Following the US sub-prime disaster in 2006, banks and traders stampeded to move billions of dollars in pension funds and equities into safe commodities, and especially foods.  When the Fed started reducing interest rates in August of 2007, many more investors jumped into the commodities markets.  A spike in world food prices took off.  In the food crisis of 2008, t he investment banking firms’ speculation and restructuring of the food commodity markets pushed 250 million new people into food insecurity and starving, and brought the world total up to over a billion people.  Through holding positions with just a fraction of investors’ money, the investment banking firms gathered an immense pool of cash to buy T-bills which they could then leverage into a far greater pool. 

Hedge fund manager Michael Masters estimated that on the regulated exchanges in the U.S., 64 percent of all wheat contracts were held by speculators with no interest whatever in real wheat. They owned it solely in anticipation of price inflation and resale. George Soros said it was “just like secretly hoarding food during a hunger crisis in order to make profits from increasing prices.”

As if by magic, food prices fell in late 2008, though certainly not back down to where they were in 2003.  In mid 2009, they started rapidly climbing again and since late summer 2010, they have spiked to record highs.

Olivier de Schutter, UN Rapporteur on the Right to Food, is in no doubt that speculators are behind the surging prices. “Prices of wheat, maize and rice have increased very significantly but this is not linked to low stock levels or harvests, but rather to traders reacting to information and speculating on the markets,” he says.

“People die from hunger while the banks make a killing from betting on food,” says Deborah Doane, director of the World Development Movement in London.

While the drought in Russia and the flood in Pakistan have cut into the world’s wheat supply and have driven up the prices of many products and even other grain commodities, out of control commodities futures markets are wreaking havoc on the world’s poor.  Food price spikes lead to global instability because the world’s poor are hardest hit by food price inflation.  Economists at the University of Adelaide recently examined the impact that food prices have on civil conflict in 120 countries in the past 40 years. “Our main finding is that in low-income countries increases in the international food prices lead to a significant deterioration of democratic institutions and a signifi cant increase in the incidence of anti-government demonstrations, riots, and civil conflict,” the researchers note.

Food price inflation is a serious problem in Egypt.  In a survey published by Credit Susse in January, Egyptians reported that they spent 41% of their income on food (see page 22) which was much higher than the 17% that Brazilians reported and the 20% that Saudi Arabians and the Chinese reported. Egypt is the world’s largest importer of wheat, and though Egypt’s government heavily subsidizes the cost of bread, with the price of all commodities spiking, Egypt’s food price inflation is variously reported as 16 to 20%.

We also need to understand how much policies in affluent countries that encourage taking a food crop and making it into an alcohol to power cars in the West have helped drive up the cost of world’s price for corn which has in turn has pushed the price of wheat up.  [The price of corn has gone up 88% in the last year, and the price of wheat has gone up 114%.]  According to The Wall Street Journal, in 2001, only 7 percent of U.S. corn went to ethanol. By 2010, the ethanol share was 39 percent. Instead of growing wheat, our farmers are growing corn in order to cash in on ethanol subsidies.  This is driven by billions of dollars in government subsidies and a mandate to blend ethanol into gasoline for our cars. And this is having a direct impact on world food prices, which spiked to record levels in January.

Environmentalist opposition to ethanol subsidies has grown to the point that news articles simply state that environmentalists are opposed to ethanol subsidies.  The Natural Resources Defense Council points out that when all direct and indirect costs are added, corn ethanol creates more global warming pollution than the oil it is supposed to replace.  The Sierra Club writes:

If every vehicle in the United States were powered by ethanol, only one of eight would be driveable. Replacing just one-eighth of U.S. gasoline consumption would require the country’s entire corn crop.

Corn-based ethanol’s contribution to fighting global warming is marginal at best. A debate is raging, in fact, over whether ethanol takes more energy to produce than it provides. Ethanol burns cleaner than gasoline, but its production relies heavily on diesel-chugging tractors and petroleum-derived fertilizers, to the tune of some 140 gallons of oil per acre. Distilling corn into ethanol is also energy intensive, and while some forward-thinking producers are processing it with methane, biomass, and other alternative fuels, most of the 190 ethanol plants now in the works will be powered by coal. A recent survey by the University of California at Berkeley found that corn-based ethanol cuts greenhouse-gas emissions by, at best, 13 percent over gasoline.

Worldwatch Institute:

Studies suggest that the environmental costs of producing “first-generation” biofuels such as corn-based ethanol on a large scale likely outweigh the benefits. These costs include increased water pollution, the loss of wildlife habitat, and declining freshwater resources. Of particular concern is the link between biofuels expansion and the global conversion of land for agriculture, as biofuel crops compete with forests and food crops for limited land and other resources.  Corn ethanol leads to only minimal, if any, reductions in greenhouse gas emissions, an oft-touted benefit and justification for expanding biofuels production. Current best estimates suggest that corn ethanol provides only a 12 to 18 percent net reduction in emissions, on average, compared to gasoline.

In November, Energy Secretary Steven Chu made a pitch for using biomass to make synthetic versions of gasoline, diesel and jet fuel rather than ethanol, saying that “ethanol is not an ideal transportation fuel.”  In November, the League of Conservation Voters, the Union of Concerned Scientists, Clean Water Action, Friends of the Earth, National Audubon Society, Sierra Club, World Wildlife Fund, Clean Air Task Force, Environment America, Environmental Working Group, Foreign Policy in Focus, National Wildlife Federation, Maryknol l Office for Global Concerns, Natural Resources Defense Council, Oxfam America, and the Safe Climate Campaign joined in writing a letter to Congressional leaders asking that the ethanol tax credit not be extended.

When a mix Democratic and Republican senators, ranging from Diane Feinstein to Jim DeMint (but mostly from populous states on the coasts), ganged up on the farm-staters last year, the ethanol tax credit was almost eliminated.  It was dead in the water until farm-staters’ votes were needed to push through the tax bill in December. Suddenly, ethanol subsidies were back in.

When looking for causes of unrest in less affluent countries, we in the West really need to look in the mirror.

by Sheldon Motley | citizens.for.obama@gmail.com

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4 comments

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