It’s tempting to believe high prices are all about price gouging. But the reality is far wilder. By Kate Aronoff.
"The deregulation of derivatives trading in the 2000s and introduction of lightning-fast algorithm-based trading, Rupert Russell, author of Price Wars: How the Commodities Markets Made Our Chaotic World, told me, has created a more abstract relationship between commodity prices and underlying supply and demand dynamics, which have never been the perfectly efficient forces economists tend to paint them as. It also means that commodities whose physical forms share little in common tend to be closely synced on the trading market. A trading algorithm scanning worrying headlines about an attack on an oil field in Iraq can drive up the price of bread in Egypt, far more so than if it were just a matter of the fuel used to transport wheat getting more expensive. Richer countries can insulate themselves from such swings. Poorer ones generally can’t. “You essentially have [an] amplification effect,” Russell tells me. “The way speculation works is that it incentivizes guessing what other people are doing. You’re not rewarded for being correct. You’re rewarded for guessing what the others are guessing.”
The Dodd-Frank financial reforms—passed in the aftermath of the 2008 financial crisis—attempted to rein in some of these volatile dynamics in paper-barrel trading, but the language included in the original law has never been implemented, in part thanks to lobbying and lawsuits brought by secretive and enormously influential forces such as the International Swaps and Derivatives Association, or ISDA.
The deregulation of derivatives trading in the 2000s and introduction of lightning-fast algorithm-based trading, Rupert Russell, author of Price Wars: How the Commodities Markets Made Our Chaotic World, told me, has created a more abstract relationship between commodity prices and underlying supply and demand dynamics, which have never been the perfectly efficient forces economists tend to paint them as. It also means that commodities whose physical forms share little in common tend to be closely synced on the trading market. A trading algorithm scanning worrying headlines about an attack on an oil field in Iraq can drive up the price of bread in Egypt, far more so than if it were just a matter of the fuel used to transport wheat getting more expensive. Richer countries can insulate themselves from such swings. Poorer ones generally can’t. “You essentially have [an] amplification effect,” Russell tells me. “The way speculation works is that it incentivizes guessing what other people are doing. You’re not rewarded for being correct. You’re rewarded for guessing what the others are guessing.”
The Dodd-Frank financial reforms—passed in the aftermath of the 2008 financial crisis—attempted to rein in some of these volatile dynamics in paper-barrel trading, but the language included in the original law has never been implemented, in part thanks to lobbying and lawsuits brought by secretive and enormously influential forces such as the International Swaps and Derivatives Association, or ISDA."
Read the article in The New Republic.