30/04/2013 by Don Quijones
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.”