Inflation & Interest Rate Conspiracy

[mj.scuba]

I'm not usually one for conspiracy theories but here's one that entered my head yesterday with the announcement of inflation at 4%, and interest rates likely to go up as well.

 

So 'the banks' screwed up by lending to people who were not good for it. Then they take public funds to bail them out, but they still need to substantially re-capitalise their balance sheets.

 

So here's what they do. Instead of lending to businesses like we keep being told they're meant to be doing, they give their remaining monies to their mates on the commodity markets; to speculate on things like wheat and oil. This drives up the price of fuel and food, which in turn drives up inflation. The central banks then raise interest rates, which means the banks can then charge a higher rate to their existing lenders.

 

It's a win win situation for them, any commodities they hold can be dumped back on the market at the highest price so they make a huge profit on that too.

 

Is this plausable or have I just been thinking too much?

[Wildcat]

That is pretty much how it works and one reason it is so scandalous that they are not being held to account for the damage they have done to the economy.

[biotechpete]

I think most people would agree that a large part of the money markets "perform no socially useful function".

 

It has always seemed odd to me that it is so oft claimed that the city institutions make money for the country. I find myself asking where that money comes from...and well... I suppose the answer to that is always ultimately us whether through bail outs or interest rates or inflation (a proportion of this inflation being caused by the QE money given to banks as bail outs).

 

I have come to the conclusion that it is impossible to make large amounts of money in any real sense the ultimate conclusion seems always to be inflation.

[Vague_Boy]

I'm not usually one for conspiracy theories but here's one that entered my head yesterday with the announcement of inflation at 4%, and interest rates likely to go up as well.

 

Inflation is not rising prices. Rising prices are a secondary effect. It's a common mistake so don't feel too bad about it.

 

When we speak of inflation, just what is being inflated? It's the money supply. This causes currency debasement. Your money becomes worth less, so it buys less.

 

It's all explained here.

 

The late and great Milton Friedman told us that inflation is always and everywhere a monetary phenomenon. But there is an asterisk to his equation that we need to examine, namely, the velocity of money. Sometimes a fast-growing money supply is not as inflationary as you might think. Then we will take quick looks at why the banking sector is in for more and larger rounds of write-offs, as well as note that the housing industry is in a hole but is gamely digging itself deeper. This week's letter will require you to put your thinking cap on as we travel to a mythical island to get an understanding of how the economy really works. There are a lot of charts, so the letter may again print long, but the word length is normal. And with no "but first," we jump right in.

 

To put it simply,

 

Printy, printy

[Vague_Boy]

One of the reasons why oil is increasing in price

 

WikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices

 

Factor in the following

 

The Great "Chindia" Oil Grab

 

Increased demand + static or diminishing supply = inflation

 

As for food prices, here's the official story

 

Following the 2008 peaks, good harvests for most basic foods helped prices to fall back.

 

But in 2010, severe weather in some of the world's biggest food exporting countries damaged supplies.

 

That has helped to push food prices almost 20% higher than a year earlier, according to the FAO. (The 2010 figure was slightly below the annual measure for 2008 as a whole.)

 

Flooding hit the planting season in Canada, and destroyed crops of wheat and sugar cane in Australia.

 

In addition, drought and fires devastated harvests of wheat and other grains in Russia and the surrounding region during the summer, prompting Russia to ban exports.

 

As a result, wheat production is expected to be lower this year than in the last two years, according to US government estimates.

 

LINK

 

But for the banksters, there's always money to be made.

 

How Goldman Sach gambled on starvation

 

This is the story of how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch, and more – have caused the starvation of some of the poorest people in the world.

 

It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions."

 

Most of the explanations we were given at the time have turned out to be false. It didn't happen because supply fell: the International Grain Council says global production of wheat actually increased during that period, for example. It isn't because demand grew either: as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other factors – like the rise of biofuels, and the spike in the oil price – made a contribution, but they aren't enough on their own to explain such a violent shift.

 

To understand the biggest cause, you have to plough through some concepts that will make your head ache – but not half as much as they made the poor world's stomachs ache.

 

For over a century, farmers in wealthy countries have been able to engage in a process where they protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he'll lose some cash, but if there's a lousy summer or the global price collapses, he'll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked.

 

Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. A market in "food speculation" was born.

 

So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000 to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles's crop at all.

 

So what has this got to do with the bread on Abiba's plate? Until deregulation, the price for food was set by the forces of supply and demand for food itself. (This was already deeply imperfect: it left a billion people hungry.) But after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops – and the speculators drove the price through the roof.

 

Here's how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world's frightened investors stampeded on to this ground.

 

So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.

 

When I asked Merrill Lynch's spokesman to comment on the charge of causing mass hunger, he said: "Huh. I didn't know about that." He later emailed to say: "I am going to decline comment." Deutsche Bank also refused to comment. Goldman Sachs were more detailed, saying they sold their index in early 2007 and pointing out that "serious analyses ... have concluded index funds did not cause a bubble in commodity futures prices", offering as evidence a statement by the OECD.

 

How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period – but only a fraction as much as the ones affected by speculation. Her research shows that speculation was "the main cause" of the rise.

 

So it has come to this. The world's wealthiest speculators set up a casino where the chips were the stomachs of hundreds of millions of innocent people. They gambled on increasing starvation, and won. Their Wasteland moment created a real wasteland. What does it say about our political and economic system that we can so casually inflict so much pain?

 

If we don't re-regulate, it is only a matter of time before this all happens again. How many people would it kill next time? The moves to restore the pre-1990s rules on commodities trading have been stunningly sluggish. In the US, the House has passed some regulation, but there are fears that the Senate – drenched in speculator-donations – may dilute it into meaninglessness. The EU is lagging far behind even this, while in Britain, where most of this "trade" takes place, advocacy groups are worried that David Cameron's government will block reform entirely to please his own friends and donors in the City.

 

LINK [The Independent, July 2, 2010)

 

It should be noted that the likes of Goldman Sach, Merrill Lynch and JP Morgan are not banks as we understand them but investment houses. They are not the same as HBOS or HSBC.

 

They don't build railroads or smelt steel like the tycoons of a century ago, they exist to do one thing, make money. They should not be bailed out if they get into trouble, they should be allowed to fail. In fact, they should be encouraged to fail.

 

But lookee here....

 

Critics Rip White House Links to Goldman Sachs

 

As the SEC builds its case charging Goldman Sachs with defrauding thousands of consumers, critics continue to hammer at White House links to the firm. Goldman Sachs CEO Lloyd Blankfein met twice with President Obama and twice with economic aide Larry Summers while SEC investigators probed the company. A White House spokesman says the case was never discussed with Goldman or the SEC. But the Goldman-White House ties and their potential impact on policy still troubles many critics. Obama collected nearly $1 million in presidential campaign contributions from Goldman's political action committee, workers and relatives, reports McClatchy Newspapers.

 

In addition, several former Goldman executives hold senior positions in the Obama administration, and now Goldman is hiring former Obama counsel Gregory Craig to defend it against the SEC charges. "Almost everything the White House has done has been haunted by the personnel and money of Goldman" and triggered "suspicion that the White House was pulling its punches out of deference to Goldman and its war chest," said University of Minnesota political science Prof. Lawrence Jacobs.

 

LINK

List of Goldman Sach employees working at the White House and U.S. Treasury Department

 

But I'm sure there's absolutely no conflict of interest.

[epiphany]

I'm not usually one for conspiracy theories but here's one that entered my head yesterday with the announcement of inflation at 4%, and interest rates likely to go up as well.

 

So 'the banks' screwed up by lending to people who were not good for it. Then they take public funds to bail them out, but they still need to substantially re-capitalise their balance sheets.

 

So here's what they do. Instead of lending to businesses like we keep being told they're meant to be doing, they give their remaining monies to their mates on the commodity markets; to speculate on things like wheat and oil. This drives up the price of fuel and food, which in turn drives up inflation. The central banks then raise interest rates, which means the banks can then charge a higher rate to their existing lenders.

 

It's a win win situation for them, any commodities they hold can be dumped back on the market at the highest price so they make a huge profit on that too.

 

Is this plausable or have I just been thinking too much?

 

Yes it is plausible. Of course, some people will call you a "nutty conspiracy theorist" for suggesting that financial institutions would naturally seek ever more complex and underhanded ways to extract wealth from the economy.

 

The people at the top of these investment houses are not stupid. They know the markets inside out and therefore it stands to reason they know how to manipulate them to their advantage. Socialise the risk, privatise the profit is their mantra.

[Longcol]

Inflation is not rising prices. Rising prices are a secondary effect. It's a common mistake so don't feel too bad about it.

 

When we speak of inflation, just what is being inflated? It's the money supply. This causes currency debasement. Your money becomes worth less, so it buys less.

 

 

To put it simply,

 

Printy, printy

 

Which is simply a simplistic way of looking at the world.

 

What was the money supply in GB when the Domesday Book was compiled?

 

Could we have moved away from that way of living without more money injeted into the system?

[Cyclone]

I'm not usually one for conspiracy theories but here's one that entered my head yesterday with the announcement of inflation at 4%, and interest rates likely to go up as well.

 

So 'the banks' screwed up by lending to people who were not good for it. Then they take public funds to bail them out, but they still need to substantially re-capitalise their balance sheets.

 

So here's what they do. Instead of lending to businesses like we keep being told they're meant to be doing, they give their remaining monies to their mates on the commodity markets; to speculate on things like wheat and oil. This drives up the price of fuel and food, which in turn drives up inflation. The central banks then raise interest rates, which means the banks can then charge a higher rate to their existing lenders.

 

It's a win win situation for them, any commodities they hold can be dumped back on the market at the highest price so they make a huge profit on that too.

 

Is this plausable or have I just been thinking too much?

 

Raising the base rate also increases the rate at which the banks must borrow, and they all have to borrow, so it doesn't benefit them. And as scams go, I think they'd rather that the market hadn't crashed and that they hadn't needed to borrow government money.

[Guest sibon]

I'm not usually one for conspiracy theories but here's one that entered my head yesterday with the announcement of inflation at 4%, and interest rates likely to go up as well.

 

So 'the banks' screwed up by lending to people who were not good for it. Then they take public funds to bail them out, but they still need to substantially re-capitalise their balance sheets.

 

So here's what they do. Instead of lending to businesses like we keep being told they're meant to be doing, they give their remaining monies to their mates on the commodity markets; to speculate on things like wheat and oil. This drives up the price of fuel and food, which in turn drives up inflation. The central banks then raise interest rates, which means the banks can then charge a higher rate to their existing lenders.

 

It's a win win situation for them, any commodities they hold can be dumped back on the market at the highest price so they make a huge profit on that too.

 

Is this plausable or have I just been thinking too much?

 

Some of this is very plausible. Certainly, there are dark forces at work pushing up the prices of commodities.

 

High interest rates don't really help the banks though, because they have to pay them as well as charge them. It is the margin between borrowing and lending that matters. Which is why most banks are making loads at the moment.

 

Inflation was inevitable as soon as we embarked upon the path marked "Quantitative Easing". Indeed, I believe that it is a deliberate strategy to reduce the value of the deficit. Thought up by the hapless Gordon, but the coalition have done nothing whatsoever to discourage the scourge of inflation. The sins of yesterday will be paid for by the savers of today.

[Rupert_Baehr]

Inflation: Too much money chasing too few goods.

Food price rises: Too little food offered for sale to fill too many bellies.