The Ukraine invasion, Brexit, the Arab spring, Donald Trump’s “children in cages” and other chaotic events throughout the last decade all sprang from one “deceptively simple” source – prices, according to sociologist and documentarian Rupert Russell.
In 2000, President Bill Clinton deregulated commodity markets under the Commodity Futures Modernization Act, allowing much greater Wall Street speculation on the price of necessities like oil, wheat, metals and coffee. In the ensuing years, the investment influx turned the commodity markets into “casinos” that yielded wild price spikes and collapses detached from physical supply and demand, according to Russell.
For his 2022 book Price Wars, Russell traveled the globe to visit regions hit by the price swings, and draws clear lines between his gonzo account of the chaos he witnessed, commodity market prices and the markets’ deregulation.
We spoke to Russell about how financial speculators have sown a new era of chaos.
In the book you talk about the butterfly effect, the idea that seemingly trivial, localized events can result in much larger consequences. One example was the 2010 Russian wildfires, which speculators thought would cause a wheat shortage (they did not). How did that help ignite a revolution in Tunisia, the Arab spring, war in Ukraine and other chaos throughout the last decade?
The Arab spring in 2010 was triggered by a food price spike essentially driven by a rally on wheat futures. What was interesting about the 2010 price spikes – and one before it, in 2008, which caused a global food crisis and riots in 48 countries – is both were events whereby small disturbances to the real world ended up producing enormous price spikes, which turned these local grievances into revolutions and civil war.
Although we called what happened in 2008 and 2010 “food crises”, they occurred in years that produced more food than any other before it. These were actually years of abundance, so the “food crises” actually were food price crises that were very much only creations of the commodity market.
So the chaos begins in financial markets and turns local disturbances into global events with surging commodity prices, because commodity prices have incredible power to disrupt society.
Why have we suddenly got these food riots, bread riots, soaring inflation, cost of living crises, refugee crises? Where’s all this coming from? It wasn’t there in the 80s and 90s, and my book is arguing there was this change in 2000 that essentially put an amplification engine into the commodity market.”
How have these food price crises rippled across the decade?
It was very clear that Brexit was in large part driven by the global refugee crisis, which was caused by the civil wars in Libya, Syria and Yemen, all of which had their origins in the Arab spring.
These civil wars not only created refugee crises which created a [rightwing] populism surge in Europe, they also created chaos that’s priced back into the market. Chaos in the market creates chaos in the real world that creates more chaos in the market. There’s a feedback loop.
Almost by definition when you have a war, you see oil price spikes. So what happens when you get high oil prices? [Venezuela’s former president Hugo] Chávez borrows tons of money right before his election campaign and goes on a huge spending bonanza, handing out TVs, washing machines and so forth. Putin builds up his war chest and modernizes his military. And a ton of this oil money gets recycled in western assets, in particular real estate in San Francisco, London, New York, and that creates a crisis.
What’s so fascinating is how, say with the Russian wheat crop fears, speculators are often wrong about what happens in the real world but it doesn’t matter. Speculators that are first to bet on prices’ movement correctly still get paid even if the prices are detached from supply and demand, while the public often pays higher prices.
It’s not important for speculators to be right, and that’s the paradoxical way in which we set up these markets
Isis is another good example of this. You detail how oil prices spiked in 2014 when the group took Mosul. But Isis, a Sunni group, had overrun a Sunni city nowhere near an oil field. The Shias and Kurds controlled the oil fields, would defend them, and, as you note, there was never the physical oil shortage that the price surge suggested.
These narratives automatically assume when there’s war in petro states then supply will go down and prices should rise, but there’s no rational or historical reason to think that will be the case.
Except for the physical destruction of infrastructure, nothing stops barrels of oil from moving. Even if Isis takes over Syria or Iraq’s oilfields, they pump the oil, sell it through Turkey and it’s back in the global market – that’s the reason you take an oilfield.
In March 2003 the Bush invasion of Iraq happened and oil prices fell. This was before speculators took over the market and it was dominated by traders much more grounded in the boring world of buying and selling oil barrels who knew Bush’s number one priority was to pump oil.
And those high oil prices further destabilize. You cite University of Denver research that found a strong correlation between the number of conflicts globally and higher oil prices. After the 2008 oil price spike, Russia invaded Georgia. Following 2014 and 2021 speculation-driven oil spikes, Russia invaded Ukraine.
We see this all this time, not just in Russia. In 2008, when oil prices were high, we had the so-called Pink Tide in South America with Venezuela bullying its neighbor Colombia, or Iranian proxies launching rockets into Israel. It really is the strengthening of petro state regimes to do things they always wanted to do but didn’t have the means.
An absurd example you note that highlights the role algorithms play in unhinging prices from reality is Anne Hathaway’s connection to Berkshire Hathaway’s stock value. Bad news for the actor gets translated into bad news for the company just because they share a name!
Speculators I spoke with said if you really want to understand how markets work, you’ve got to understand how Berkshire Hathaway is correlated to Anne Hathaway’s film career.
Whenever an Anne Hathaway films come out, Berkshire’s Hathaway stock gets a bump. And when bad things happen to Anne Hathaway, like when she got into a car accident, Berkshire Hathaway’s stock goes down.
What they’re saying is they have algorithms that are reading headlines – think Reuters, Bloomberg stories – that are fed into the computer and can detect whether it’s a negative or positive story and trade accordingly.
You argue hedge funds betting on the coffee market eventually lead to Trump’s “kids in cages” policy where more than 1,000 children of undocumented migrants were separated from their parents at the US border. Can you unpack that a little?
In Guatemala in 2018-2019 there were two different shocks coming together. Central America has long been seen as one of the most vulnerable regions to climate change and I interviewed coffee farmers there who spoke about how changes in rainfall patterns, humidity and temperature promoted the growth of fungus called “rust’’, and they had to spend more money on fertilizers to beat back this pest.
To pay for the fertilizers, they borrowed money from local lenders at extortionate interest rates. So they go into debt, harvest their crop, go to market to sell it, but in 2018-2019 global coffee prices had declined severely to the point where they were making a loss.
What caused coffee prices to crash?
There were narratives of surging production in Brazil and of new countries producing a global glut in coffee. Many commodity traders have historic shorts on the coffee market [bets that the price will fall] … and all of these markets, especially coffee, are tiny. Just one pension fund could be larger than the entire coffee market. So, yes, there was a surge in coffee supply globally but the crashing of the coffee prices was driven by this lopsided bet that hedge funds made that crushed the markets.
Then you have hundreds of thousands of farmers and the communities that depend on their income lose money on that crop who are essentially bankrupted, so they lose everything – their house, their land. It ended up sending them to where they have gone for decades in times of crisis – the US. We saw commodity markets as an amplifying engine, amplifying a local climate shock into an international global event, which was the US border crisis.
We didn’t hear much in 2019 connecting Wall Street to kids in cages. Why is most reporting missing the root causes?
The monsters are the better story and that’s what gets reported, shared and enjoyed by consumers. We default to monster stories and that’s what I’m trying to push against.
Trump is a monster and putting kids in cages is a monstrous thing, but that ends up becoming the debate and we have to remember that the origin of all this chaos lies elsewhere.