How Goldman Sachs Created the Food Crisis

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Posted By Dr. Mercola | May 19 2011

Food is becoming more expensive around the world. In fact, world food prices rose to near a record high this April as grain costs continued to increase. The cost of living in the U.S. has been rising at its fastest pace since December 2009, and Chinese consumer prices have been going up at their fastest rate since 2008.

One reason for the rise in food prices is Wall Street greed. In 1991, bankers at Goldman Sachs came up with a new kind of investment product, a derivative that tracked 24 raw materials, including food products, as part of a single mathematical formula they called the Goldman Sachs Commodity Index (GSCI).

The problem came in 1999, when the Commodities Futures Trading Commission deregulated futures markets, and bankers could take as large a position in grains as they liked -- something which had been forbidden to all but those actually involved in food production since the Great Depression.

According to Foreign Policy:

"The structure of the GSCI paid no heed to the centuries-old buy-sell/sell-buy patterns ... This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying -- no matter what the price ...

Not only does the world's food supply have to contend with constricted supply and increased demand for real grain, but investment bankers have engineered an artificial upward pull on the price of grain futures. The result: Imaginary wheat dominates the price of real wheat, as speculators (traditionally one-fifth of the market) now outnumber bona-fide hedgers four-to-one."

Sources:

  Video Rebel April 28, 2011 
  Bloomberg May 5, 2011

 

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It's no secret that food prices are rising and will continue to rise.

Rising grain costs recently pushed world food prices to near-record levels, and an index of 55 commodities rose to 232.1 points in March, just short of an all-time high record of 237.2 set in February, Bloomberg reported.

If you live in the United States it is not so much that the price of food is rising, it is that the value of the US dollar is being decimated and will continue to decline as long as the U.S. Federal Reserve continues printing not billions, but trillions, of dollars out of thin air, thereby creating inflation.

This, in turn, leads to a devaluation of the dollar and an increase in prices for most commodities, including food. But another cause of the food crisis can be pinned on Wall Street greed and the creation of the Goldman Sachs Commodity Index (GSCI) in 1991.

As Frederick Kaufman wrote in Harper's Magazine:

"The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment."

How the Goldman Sachs Commodity Index May be Driving the Food Crisis

GSCI (which is now owned by Standard & Poors) follows an index of raw materials including foods such as wheat, livestock and edible oils all rolled into a type of derivative investment that appears much like a stock.

Writing in Foreign Policy, Kaufman explained:

"Once the commodity market had been made to look more like the stock market, bankers could expect new influxes of ready cash. But the long-only strategy possessed a flaw, at least for those of us who eat. The GSCI did not include a mechanism to sell or "short" a commodity.

This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying -- no matter what the price. Every time the due date of a long-only commodity index futures contract neared, bankers were required to "roll" their multi-billion dollar backlog of buy orders over into the next futures contract, two or three months down the line.

And since the deflationary impact of shorting a position simply wasn't part of the GSCI, professional grain traders could make a killing by anticipating the market fluctuations these "rolls" would inevitably cause."

Ultimately, dozens of bankers joined the "commodities index game" in the years to come, setting the stage for food inflation. One of the most glaring examples was hard red spring wheat, which typically trades for $4 to $6 for a 60-pound bushel. At one point the commodities market drove the price up to $25.

Kaufman wrote:

"Today, along with the cumulative index, the Standard & Poors GSCI provides 219 distinct index "tickers," so investors can boot up their Bloomberg system and bet on everything from palladium to soybean oil, biofuels to feeder cattle.

But the boom in new speculative opportunities in global grain, edible oil, and livestock markets has created a vicious cycle. The more the price of food commodities increases, the more money pours into the sector, and the higher prices rise."

Banks are No Strangers to Fraud

The GSCI is not "fraud," per se, but it is hard to believe that the bankers who created it did not have some forethought into what it might do to food prices around the globe. This lack of concern for anyone, or anything, beyond the profitable future of the bank is common in the banking industry.

Fed Chairman Ben Bernanke has admitted that the U.S. central bank created $1.3 trillion out of thin air to buy mortgage-backed securities. Now banks are offering just $5 billion to settle a probe of their foreclosure practices by state and federal officials.

As Bloomberg reported:

"The probe by all 50 states was triggered by claims of faulty foreclosure practices after the housing collapse, which state officials said may violate their laws.

In a new proposal, officials called for a fund, administered by state and federal officials, that would in part pay for principal writedowns, said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller."

As for the $5 billion settlement offer, it would be a steal of a deal for the banks. As quoted in Bloomberg:

""An amount in that range would be viewed as a positive for the banks, given larger numbers have been referenced previously," Brian Foran, an analyst with Nomura Securities International Inc. in New York, wrote in a report today. Regulators had previously suggested a $20 billion penalty."

So the banks make TRILLIONS and pay just a $5-billion fine. Seems like a pretty good trade on their end. For more insights into the many underhanded dealings common in the banking industry, be sure to read Video Rebel's blog Arrogance of a Banker.

Why Buying Cheap Food is Not the Solution to Riding Out the Food Crisis

As food prices continue to soar you may be tempted to temper the costs by buying the least expensive food you can find. But cheap food is actually incredibly expensive once everything is added up, including stratospheric health care costs, continued dependence on fossil fuels, and the destruction of the earth as a whole.

None of these immeasurable costs are factored into the $1 cheeseburger you had for lunch, but they exist nonetheless.

When it comes to the price of food, it's extremely important to remember that a food cannot be judged by its sticker price alone. Believe me, a diet consisting of daily $1.99 hamburgers and other fast foods, while appearing to be frugal, is far from it when you consider what these foods are doing—or not doing—to your health.

Still, my readers regularly have informed me that one of the leading obstacles to achieving health is having too limited a budget to maintain a healthy lifestyle ...

If events play out as some experts predict, the U.S. economy will face even more challenges and if you are unprepared, your ability to purchase quality food to stay healthy may become even more limited. But rest assured, by knowing how to get the best value for the most nutritious foods you can still protect and optimize your health without going bankrupt in the process.

How to Get Quality Food at the Right Price

The best "bargains" at your grocery store may not always be one in the same with the best choices for your health. Watch out for sales and low prices on cheap, processed pseudo-foods and realize that even if you can get a can of processed ravioli or a bag of chips for under $1, that money is being essentially wasted because the food is doing absolutely nothing beneficial for your health.

You're better off spending that dollar on a pound of string beans or zucchini, or putting it toward a pound of grass-fed meat, than you are throwing it away on processed junk food.

Fortunately, you can still find many affordable, nutritious foods at your farmer's market or local health food store, or even at the corner grocery. For ideas, here are 10 of the healthiest foods you can buy for typically less than $1. If you want to save money, also steer clear of those precut, ready-to-use fruits and veggies, as they can cost twice as much as the uncut and unprepared versions.

A common perception is that whole organic food is so expensive that it is out-of-budget for the average family or even for the average single consumer. However, with the tips in this past article you can learn how to buy organic foods for your family for the same price as processed foods.

You can also help tweak your food purchases to get the most health "bang for your buck" by focusing on those that are right for your nutritional type. The nutritional typing assessment is now absolutely free, and will give you an idea of which foods you should eat for optimal health and nutrition.

Finally, if you really want to save on groceries and get the freshest produce available you can even consider starting your own vegetable garden. When factoring in startup and maintenance costs, a well-maintained food garden yields a $500 average return each year compared to the market price of produce, according to the National Gardening Association (NGA). So there is a definite financial incentive there.

Remember, with inflation and the devaluation of the dollar driving prices higher, Americans will no longer be able to depend on cheap imports and food products from China.

It is therefore important to use your money to support the small "mom and pop" shops that get their goods from local suppliers, buy your food from a small local farm, and value quality USA-grown foods over imports.

(Send your news to foodconsumer.org@gmail.com, Foodconsumer.org is part of the Infoplus.com ™ news and information network)