The Financialisation of H₂0: The Final Frontier of Bankster Capitalism

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30/04/2013 by Don Quijones

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First Posted in January 2013.

A little-known US investment fund called Waterfund LLC recently announced that it had signed an agreement with IBM (NYSE: IBM) to develop a Water Cost Index (WCI). What this effectively means is that the world is about to witness the financialisation of the most valuable commodity on the planet: water.

In the words of Scott Rickards, the President & CEO of Waterfund (emphasis added):

By calculating the unsubsidized cost of freshwater production using IBM’s Big Data expertise, Waterfund can offer the first flexibly-tailored financial tools to investors in water infrastructure.  The Rickards Real Cost Water Index™ highlights the energy costs, interest rate risk, and capital expenditures required to build and maintain large-scale water treatment and delivery networks.

The move is just the latest chapter in the financial sector’s ongoing takeover of the global commodity markets. Through the proliferation of ever more complex financial instruments and the creation of markets for things like food and energy, water and carbon, the banks and other private corporations have gained unprecedented levels of influence over both the economy and the natural resources we so often take for granted. By putting a price on literally all the world’s natural wealth and then creating layer upon layer of speculative bets and claims on that wealth, the financial industry has pulled off one of the stealthiest land and power grabs in history.

According to various distinguished sources, the face value of all derivatives outstanding tops a quadrillion (1,000 trillion) dollars, or more than 14 times the entire world’s annual GDP. That works out at roughly 180,000 dollars worth of debt for everyone on the planet, including you and I. Welcome, my friends, to the financialisation revolution!

But what does financialisation actually mean? According to Wikipedia, it is “an economic system or process that attempts to reduce all value that is exchanged (whether tangible, intangible, future or present promises, etc.) either into a financial instrument or a derivative of a financial instrument. The original intent of financialisation is to be able to reduce any work-product or service to an exchangeable financial instrument, like currency, and thus make it easier for people to trade these financial instruments.”

One need only glance at the graph below to see how financialisation has transformed the futures markets in the last 40 or so years:

Cornering Markets, Hoarding Products

One of the biggest beneficiaries of the financialisation revolution has been U.S. banking behemoth JP Morgan Chase, which has somewhere in the region of 70 trillion dollars of derivatives exposure and is alleged to have virtual control over the comparatively small silver market. The bank was also recently granted permission by the SEC to launch a new copper fund whose shares would be backed by warehoused copper.

As Linda Khan reports in the New Republic, the implications for copper users are potentially very dire indeed (emphasis added):

In practical terms, the SEC handed traders at J.P. Morgan control over 20 to 30 percent of the copper available for immediate delivery from the London Metals Exchange — the commercial market where companies that use copper go to procure last-minute supplies.

The investors purchasing shares in J.P. Morgan’s fund won’t be buying copper to use, but to store. The intricacies of the fund are complex, but its underlying rationale is straightforward: the more shares investors buy, the more copper is taken off the market. And the more copper that is taken off the market, theoretically the more valuable the copper and the shares become.

This is a clear example of an individual player effectively cornering a market and hoarding a product in order to drive prices higher – a practice that, while supposedly illegal, would clearly benefit the fund’s investors, at the expense of worldwide copper manufacturers and end consumers.

The Deadly Price of Financialisation

However, it’s one thing for banks to intentionally seek to cause shortages and rising prices in a market such as copper; it’s quite another for them to do the same thing with essential life resources such as agricultural commodities and water. But since when have moral considerations stopped the big banks from turning a quick buck?

And in the agricultural derivatives markets, quick money is made and lost every minute of the day. Who cares if such speculation causes dramatic food price spikes, effectively pricing out millions of the world’s poorest families and sparking huge social unrest, as organizations such as Food Watch, Oxfam and the United Nations Conference on Trade and Development (UNCTAD) have repeatedly warned?

According to Oxfam, the number of people without enough to eat could soon top one billion. That’s more than one in seven people waking up hungry and going to bed hungry, all in the name of sating the big banks’ boundless hunger for profits – the very same too-big-to-fail banks that our taxes have helped keep alive since 2008.

One of the biggest culprits in all of this is everybody’s favourite vampire squid Goldman Sachs, which, according to Der Spiegel, has its tentacles in 25 to 30 commodities markets, including coffee, soybean, wheat and beef markets:

Agricultural commodities make up about 20 percent of the business. On the whole, investment banks have greatly expanded their commodities businesses over the last decade. Even after the financial crisis, speculating in commodities is still considered lucrative.

As a result, the markets in which contracts for agricultural commodities are traded have developed a life of their own. The volume of financial transactions is between 20 and 30 times as large as the real transactions. This would certainly be unnecessary if it were purely for the purpose of hedging against risk. In other words, speculation is the real objective. And, yet, are we to believe that speculation doesn’t impact real prices?…”

So, as the world awaits the introduction of H2O derivatives, one can only speculate about the potential consequences of financialising the most valuable finite resource on the planet. If there’s one thing you can be sure of, it is that the main, if not only, beneficiaries of this trend will be the big banks and hedge funds. But for every winner, there must be a loser and the suckers on the losing side of this trade, it appears, will be the world’s water “consumers.”

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14 thoughts on “The Financialisation of H₂0: The Final Frontier of Bankster Capitalism

  1. cgoodsthings says:

    Things could get very interesting with water financialisation, but I’m not sure if it’s in the way anyone (traders included) will expect.

    In the western half of the United States, water rights and the worth of water rights are subjects of much contention, and from what I can tell this has been true for as long as there have been water rights. And that’s not only contentions about whose water right is older. For instance, one of the local papers had a story about a lawsuit between a local water district and an individual farmer. Without getting into too much detail, disagreements about what water could be accessed by who and when eventually blew up into a lawsuit. The court’s ruling wasn’t entirely in the individual farmer’s favor, but it did drop a bombshell on the water district by pointing out the water district was a private entity, not a government entity and FOR DECADES had not been filing the proper paperwork for water use and point of withdrawal changes for its members.

    There are a few U.S. cities I know of that would be very very different places if water rights were adjudicated then the way they are now — Los Angeles and Las Vegas being a couple of those cities. And I’m not even an expert on this, those are just news stories and cable tv shows I’ve run across over the years.

    Even the U.S. states of Tennessee and Georgia (which are in the southeastern U.S.) are getting into a war over water, a state congressman or official in Georgia is dragging up a story (which may or may not be true) from about a century ago that the border between the two states was not surveyed properly because of unfriendliness of locals living along that border, so the state border should be moved north just a tiny bit — just far enough so Georgia (including the large city of Atlanta, Georgia) will suddenly have access to a river which currently does not run anywhere in their jurisdiction.

    All of which is a long winded way of saying that while yes, I do agree financialisation has made a hash of some markets (grain futures markets and precious metals markets in particular), the water market is already a hash and I’m not sure the financialisation guys would get as far as they might expect.

    On a bigger scale, there are some very skewed incentives about water use in various U.S. urban and suburban areas. This will slowly blow up bigger and bigger as tensions arise between people living in cities who are very concerned about watering their lawns and washing their cars, and farmers and ranchers who live outside the cities but grow the food that the people in the cities depend on.

    Again, if the financialisation guys want to dive into that mess, well, I guess that’s their choice. I think it may blow up in their faces more than they expect.

    And as you point out, there is a much bigger emotional emphasis on access to water, a city going without water for months because the water contract got tied up in some arcane and needlessly complicated financial instrument could be a nightmare for both the politicians and the banks involved.

    —-

    However, that’s all from a continental United States standpoint. I honestly have no idea how water right are granted, administered or adjudicated in any country besides the U.S., and it is quite probable there will be some areas that wind up in very unpleasant positions because someone signed off on a really great-looking contract without reading the attached 100+ pages of fine print. 😦

    (Just found your blog via Testosterone Pit, by the way, and am enjoying it very much.)

  2. Don Quijones says:

    Thanks for your comment, Cgoodthings. Was fascinating to read what you had to say about what is happening in the U.S. and it gives me a certain amount of hope that maybe, just maybe, the big banks will be biting off more than they can chew by manipulating the water markets – just as they have with virtually every other commodity market in the last 10 years. Also, the fact that JP Morgan appears to be under investigation by the Federal Energy Regulatory Commission (FERC) for manipulating energy markets a la Enron gives one a little cause for optimism (though, to be honest, the toothless efforts of most U.S. regulators to police the banking industry over the last 10 years are hardly confidence inspiring).

    Anyway, thanks for your great comment. Am glad that you like the blog and I look forward to heering more from you in the future. As Spanish speakers are wont to say, mi casa es su casa!

  3. […] The same people who kindly brought us the subprime crisis and the resultant Great Recession are now speculating vast quantities of money on the price of basic foods on the international commodity exchanges. As a result, the prices on these exchanges are no longer determined by real-world conditions of supply and demand but rather by the financial interests and whims of a small but extremely powerful group of big banks and hedge funds, many of whom have been gorging at the trough of taxpayer largesse for the last five years (for more information on the financialisation revolution, read this). […]

  4. […] The same people who kindly brought us the subprime crisis and the resultant Great Recession are now speculating vast quantities of money on the price of basic foods on the international commodity exchanges. As a result, the prices on these exchanges are no longer determined by real-world conditions of supply and demand but rather by the financial interests and whims of a small but extremely powerful group of big banks and hedge funds, many of whom have been gorging at the trough of taxpayer largesse for the last five years (for more information on the financialisation revolution, read this). […]

  5. […] The same people who kindly brought us the subprime crisis and the resultant Great Recession are now speculating vast quantities of money on the price of basic foods on the international commodity exchanges. As a result, the prices on these exchanges are no longer determined by real-world conditions of supply and demand but rather by the financial interests and whims of a small but extremely powerful group of big banks and hedge funds, many of whom have been gorging at the trough of taxpayer largesse for the last five years (for more information on the financialisation revolution, read this). […]

  6. […] The same people who kindly brought us the subprime crisis and the resultant Great Recession are now speculating vast quantities of money on the price of basic foods on the international commodity exchanges. As a result, the prices on these exchanges are no longer determined by real-world conditions of supply and demand but rather by the financial interests and whims of a small but extremely powerful group of big banks and hedge funds, many of whom have been gorging at the trough of taxpayer largesse for the last five years (for more information on the financialisation revolution, read this). […]

  7. Your article The Financialisation of H₂0: The Final Frontier of Bankster Capitalism | Raging Bull-shit write very well, thank you share!

  8. […] applied to other arenas, such as biodiversity and water crises, resulting in the commodification and financialisation of more and more of nature’s capacities, functions and cycles. The result is yet more corporations profiteering at the expense of the environment and the local […]

  9. […] applied to other arenas, such as biodiversity and water crises, resulting in the commodification and financialisation of more and more of nature’s capacities, functions and cycles. The result is yet more corporations profiteering at the expense of the environment and the […]

  10. […] The same people who kindly brought us the subprime crisis and the resultant Great Recession are now speculating vast quantities of money on the price of basic foods on the international commodity exchanges. As a result, the prices on these exchanges are no longer determined by real-world conditions of supply and demand but rather by the financial interests and whims of a small but extremely powerful group of big banks and hedge funds, many of whom have been gorging at the trough of taxpayer largesse for the last five years (for more information on the financialisation revolution, read this). […]

  11. […] applied to other arenas, such as biodiversity and water crises, resulting in the commodification and financialisation of more and more of nature’s capacities, functions and cycles. The result is yet more corporations profiteering at the expense of the environment and the […]

  12. […] The same people who kindly brought us the subprime crisis and the resultant Great Recession are now speculating vast quantities of money on the price of basic foods on the international commodity exchanges. As a result, the prices on these exchanges are no longer determined by real-world conditions of supply and demand but rather by the financial interests and whims of a small but extremely powerful group of big banks and hedge funds, many of whom have been gorging at the trough of taxpayer largesse for the last five years (for more information on the financialisation revolution, read this). […]

  13. margsview says:

    Still, after finally figuring it all out and knowing who to go after—why the obvious legal move to stop a illegal menace is not even mentioned or considered…beyond belief. Now, here’s another glaring question, why are taxpayers allowing any monies such as billions in corporate subsidies, lowest tax rates and the most asinine set up for yearly tax cuts is incredulous?!! Let alone why taxpayers haven’t simply just—withdrawn…….out once and for all —at least at the federal levels?

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