Transcript: Price Wars: How Prices Caused the Crisis
Transcript: Price Wars: How Prices Caused the Crisis
Interview with Rupert Russell, available to everyone
Transcript of episode with Rupert Russell.
[00:02:19] Rupert Russell: Thanks for getting in touch. Most of the coverage on the book because of the war in Ukraine has been focused on oil and Ukraine and that whole dynamic, but three chapters of the book are the three, three and a half are dedicated to the climate crisis and looking at how climate change, um, has been, uh, contributed to, to chaos over the last 10 years, of course, more than that, but in particular, the last 10 years and how the markets have been amplifying it.
And that's the, when I was writing the book that was super important to me and I put a lot of time and effort and traveled to Guatemala and Kenya and even Somalia to report that. Um. And it's great to finally talk about it in depth.
[00:02:59] Rachel Donald: Excellent. Why just, um, before we launch into what the book is for listeners, why do you think that part of it has been ignored.
[00:03:07] Rupert Russell: I think because the war on Ukraine has just dominated headlines. Um. And I think that one of the fallouts from the war in Ukraine has been the sidelining of climate conversations in general. We suddenly, we're now talking about fossil fuels and gas and where can Europe get it's gas from, and maybe they need to import coal so they don't buy gas in Russia, and then maybe we should be going to nuclear.
And, you know, over the last decade or so there has been a push for a green new deal for an energy transition, which would have completely solved this problem. And I find it pretty incredible that that is not only been totally site sidelined, but in the UK in particular, it's been actually framed in opposition to the current crisis.
Right? So you hear conversations around the conservative government having to abandon net zero in order to kind of solve the cost of living crisis when, of course, transitioning to, uh, what's it called again? Carbon zero economy would have, would, would actually be the solution of it. So I feel like the climate conversation has been sort of scrambled by, by the war in general. And actually it's never been a more important time to talk about it.
[00:04:17] Rachel Donald: All right. Okay. Um, oh, the urge to go straight into debate and then miss the introduction is strong, but I think we should, let's introduce the book. So it's price wars for anyone that hasn't read it. And I would urge anybody listening to go and pick up a copy. Um, I haven't finished it yet, but I have read, read lots of bits of it and it's so well-written, it is so clear.
You are the first person that has managed to, uh, explain to me what derivatives are and make it make sense. Like thank you. I think it's utterly brilliant. So could you just for listeners, could you just sort of explain the, the, I mean, a little bit of background about yourself and the concepts, um, and then how you came to write the book
[00:04:56] Rupert Russell: Sure. So I used to be an academia. I used to be in sociology and I specialized economic sociology. And, um, I did a PhD and I always wanted to write a book about markets and how they go wrong. Um, but I'm also dyslexic. And I thought that I'd have a happier career working in documentary films. I worked in documentary film, um, for close to 10 years and the latest film I made was Price Wars.
So it was a book and a film and it was commissioned by the Franco German broadcaster, RT. And the question was, you know, how have the commodity markets, or how have prices rather structured conflicts over the past 10 years? Now, this question was motivated by some research that I found that suggested that, uh, the Arab spring had been triggered by a sharp rise in food prices.
And if you think about the cascading crises that come from the Arab spring, right? You've got the Arab spring you've then got civil wars in Libya, Syria, Yemen, you have the rise of ISIS, all of this collectively ends up creating the global refugee crisis. That ends up by 2015, uh, sort of triggering a right wing, populous resurgence right across Europe, across the entire continent, which cumulates in Brexit, 2016 and Trump, November, 2016.
So even that little piece, just that one little price rise in 2010, created a whole cascade of crises. And so I thought this could be a fascinating way of looking at what had, what had gone wrong over the last decade.
What I ended up finding was actually multiple price shocks. So I saw sharp price rise in the price of oil that followed the Arab spring as commodity speculators placed in what they call the risk premium. Essentially, essentially they're sort of pricing in the war in Libya or Iraq disrupting global or oil production and how those high high prices led to all kinds of crazy things.
The most crazy of which was the 2014 uh, Russian invasion of Ukraine, but also the price collapse at the end of 2014, saw the collapse of Venezuela as well. You then see other things that we'll talk about later, which was a collapse in coffee prices in 2018, um, leading to a surge of migration from central America to the U.S creating the u.S border crisis.
And so the reason why the book is called Price Wars is it's essentially saying that all of these guide, the literal, what was the case in Ukraine and or economic crises like in Venezuela or surges in migration can be linked to kind of sharp shock to commodity prices. And so they, and so the origin of these conflicts is in wars. And so the uh, the answer of why they're happening has to be well what's causing these price shocks. And that, as you just mentioned, took me down a complete rabbit hole into financial derivatives, hedge funds, banks, and so forth. And so in some ways, this book is a kind of interweaving of two parallel storylines.
One storyline is the story of high finance of Greenspan, of deregulation, of the Clinton administration of the trend followers, Goldman Sachs, uh, algo traders, satellite traders, um, creating essentially volatility of the price of fuel and the price of oil. And the other side of the story is me going to these places, right? So it's a kind of Gonzo adventure to the front lines of these, of these price wars to tell the stories of the people who have been affected. And the narrative kind of jumps in between these two.
And the climate change aspect of this was something which I originally had centered at the, at the beginning, I then sort of saw it is almost like a separate issue in the sense that the commodity markets left to their own devices will create chaos independently of climate shocks. Right? You don't need a drought or a forest fire to create shocks in prices, just a rumour is enough, just perception, just the change in interest rates or a dip in the bond market can lead investors to switch from bonds to gold. Right.
But of course, what this volatility does is when it does encounter a real world shock, like we're seeing with the war in Ukraine, or it could be a climate shock as well, then the same, uh, speculaters amplify its effects. And so my sort of the big conclusion from the book on the climate front was that, you know, you don't need a kind of day after tomorrow, you know, Superstorm, which is somehow, sometimes it's sort of presented. Um, or sometimes you still get these arguments as well around like kind of malthuzian and mad max scenario is often the way, we talk about shortages and food production. It can just be something very small. It could be something very small happening in central America, maybe it's Brazil, or maybe it's, uh, in wildfires happening in Russia as it was in 2010.
And this small climate shock gets amplified by the markets. And then that then can create a tsunami of hunger across the world. And so the book is sort of looking at this feedback loop between chaos in the real world and chaos in the markets and how they feed off each other.
[00:10:08] Rachel Donald: What an excellent introduction. Thank you so much. Um, I loved it. I mean, even the introduction, sort of the explanation of how, like the butterfly wings, how the flap of a butterfly one wings can cause a storm somewhere else. Um, didn't know the origin of that as well before reading your book.
There are so many different jumping off points, uh, to everything that you've said. I mean, I kind of want to jump in, straight in, and bridge, um, Ukraine and the climate crisis, the war in Ukraine and the climate crisis, because that to me seems to be a big part of the puzzle that we're missing. Um, And it was reading your guardian article that, um, I just found so enlightening about sort of the bigger picture.
One of the fantastic statistics in your book is the food price index. So that society's boil it at 210. Um, so when the food price index hits 210, that's when chaos intervenes, or when revolutions start and people try and overthrow the regimes. Um, now immediately after reading that statistic, I went on to see where we were with the food price index, because obviously Russia, Ukraine, largest exporters of cheap wheat in the world. Um, and so it's vulnerable nations already that are going to be at risk, um, of increasing chaos as this war continues on.
I mean, what do you, what do you think is, is, is going to happen? Because I have climate scientists saying on this show that they think food systems are going to collapse, you know, in the next eight years, because of the, the big picture of what's going on. And then given how you laid out and explicated, um, the progress of chaos and revolution because of prices and speculation and given speculation is through the roof right now, because of what's going on in Ukraine and equally de-stabilizing the physical supply chains. Do you think that this war in Ukraine is going to speed up the inevitable of the collapse of Western he gemony?
[00:12:11] Rupert Russell: It's a great question.
I think that what we're seeing, I think what's, something slightly changed from when I finished writing the book to now, which is when I was writing the book many of the crises that have been caused um, and these price shocks were pretty abstracted from the real world. Right. And I think this has been true for quite a while. I think definitely since, since the, um, collapse of the Soviet union and like the long 1990s, basically to the financial crisis. Right.
So to take a different example to start with, um, we know about the financial crisis, sometimes it's called the credit crunch in Britain, or it's also sometimes called the housing crisis in the U.S. It's worth remembering that when we talk about like a housing crisis or a housing bubble, it's not like the houses like exploded in 2007, They suddenly were like, someone set fire to them and they disappeared. Right? This was a crisis that existed inside an intangible abstract digital world of derivatives. Right. And the way in which our financial system is built upon these sort of digital, now digital pieces of paper, and that sort of, you know, the computers, the equation, so to speak, exploded at some point.
The actual houses still remained there, right? So if there were houses built in Las Vegas or Florida to, they still existed. And I think this is a really crucial way in which we have to always ask ourselves. Where is the crisis? Is the crisis happening in the social game called the market? Is it happening or is it happening in a physical distribution or physical production? I think these things are crucial. So in the 2010s, most of what I was writing about was these things happening in the abstract world, right?
Even though we had a food crisis in 2008 and again, in 2010, um, both years and the previous years saw more food produced than any other year in history, right? So I'm not going to say any of these scientists predicting, uh, you know, falling crop, crop yields, and so forth are wrong. I'm not going to do that. It's definitely not my area of expertise, but it was not something which, which organically came from the book in the sense that food production every year was going up. Right. And so why are you having these huge food price, these huge food crisis, it's because it's the way in which we've sort of elected to organize our food system that was malfunctioning.
And that's a crucial point made by the brilliant Nobel prize winning economist, Amartya Sen, who essentially, uh, essentially kind of tried to reorientate our understanding of famine away from there being too little food, because often during times of famine, there was lots of foods, right? That was his great insight. The problem is people can't afford it. It's also entitlement that we could also think of it as just the social game, right? How are we exchanging things.
Now to apply this to the current crisis? It's almost like the return of the real, right? So the last 10 years from sort of let's say from 2008 to say 2019, we had a whole series of kind of Phantom digital crises that were happening in New York and London, which through the global price system were then exported across the world, and then did create real world crises and conflicts. With the pandemic we saw, first of all, the disruption of the physical supply chains. Now we're seeing in 2021, 2022, uh, disruptions to actual commodity production as well. And so now you've gotta be really careful and kind of passing, you know, when we're talking about there being a global food crisis, or what might cascade from that, what are the mechanisms that are driving it? Right?
So on the food front, yes, russia, Ukraine produce I think around 25% of the world's wheat exports, but that's only about 0.9% of global wheat production. Right? So many countries don't export or import, they produce their own wheat, right? So U.S has a net export and so forth. So actually what we could be seeing, just assume that all of Russia's wheat and all of Ukraine's wheat is off the table. You would see a 1% drop in global, uh, food production. Now, thankfully the U.S, China, other players in the world have reserves. Right. They have reserves. They could easily replenish that 1% that we are missing. So in terms of- Yeah, go on.
[00:16:48] Rachel Donald: Well, sorry to interrupt, but it's not the U.S, China and UK that are importing Russia and Ukraine's wheat. It is typically middle Eastern countries or countries in Africa as well that do not have reserves and do not have the industrial or production capacities, and are very much reliant on that wheat. So that 1% is, I mean, that's going to send shock waves through regions that are already prone to chaos because of how the markets have organized their sort of sociological infrastructure already.
[00:17:20] Rupert Russell: The shockwave is happening in the price system, right? So the first thing, the first shock wave that's happening is prices. So before anything has actually been disrupted, right, the markets will price in the future chaos. That's why they're called futures markets. So traders are trying to predict what's going to happen. And that is the shockwave.
So that was what happened in 2008, 2010 is that, is that these prices are global. And in these local markets everywhere, these are called the spot markets, more or less, right, people trading. They look to the futures prices to decide what to sell today. So they're looking at what's the March contract or the may contract or the June contract. My point about there being 1% was that yes, it's held by the U.S and Europe and China, but there's no reason why they couldn't, why that couldn't be put in boats and, you know, sent. That maybe I was missing.
[00:18:14] Rachel Donald: Yeah, yeah, yeah. Yeah. Well, hang on, hang on, hang on. Yeah. There's no reason, but then also, I mean, look, even at the pandemic, like surely we have to, um, also look at the, the evidence that we have, all of the redistribution of resources. I mean, COVAX, COVAX fell flat on its feet. The Western world did not want to distribute vaccines to the nations in need.
So, I mean, again, of course we can't say that, but given our recent history of our propensity to redistribute resources, which is very, very nil, um, I mean that 1% is gonna in the physical world cause huge problems surely.
[00:18:55] Rupert Russell: Again, I think.. I'm going to, I might get myself into trouble here because I'm not defending the UK or the U.S. I suppose, I'm just trying to dia-, in my mind, at least diagnose what the problem is. So the problem right now is high prices, right? So the reason why you're seeing problems in Lebanon, Egypt is the global prices are going up. And then what happens is that it's not just, speculation isn't just happening at the kind of hedge fund level, right? Although that's what forms, uh, the least global prices in the short term. You've got speculation happening at every social scale, and that includes the local sale prices.
If you're in Lebanon or you're in Egypt and you can see you, you can see global prices rising, what do you do, right? You hoard, right? This is just what the incentive is. If you think something's gonna be worth more tomorrow or more next week than today, then you save it, you pull it off the market. What does that end up do, that ends up driving local prices up even higher as well. Right? The spectrum of hoarding can happen at the local level as well. And you know, this is why many middle Eastern countries have attempts at price control, price subsidies, food distribution, and so forth.
And so I suppose what I'm trying to say is that you can have a panic at the prospect of there being a food shortage, that results in real world food shortages. Right? This is the point that I'm I'm, I'm, I'm trying to emphasize is that unfortunately, the way in which we've created markets, which were essentially social games around future expectations, is that just the fear of, of a shortage or a climate shock or a climate crisis can actually lead to bank runs would be one way of thinking here, but you can have runs on wheat, right? You can have people try and hoard it up and so forth. My point is to try and I suppose the point I'm trying to emphasize is that because this is a social game, right, it's something which we can, as, you know, people fix, right? This is not like a problem necessarily of a physical commodity.
And so my point is to say, that the U.S has, for example, a long history of shipping cheap subsidized grain across the world, it was a key, um, instrument in the cold war, right? The U.S used to do this to countries, especially such as Egypt and Syria to kind of keep them aligned from the Soviet union. And so you can kind of imagine a similar resurrection of, of, of that model because it hasn't, it's not that the wheat has run out now, right?
Sorry if this is getting too complicated. I suppose I'm trying to say we have a short term, we have a short-term shock of rising prices, which is totally real and it's hurting real people, but it's based on this future expectation game and the expectation game, um, is essentially saying that no wheat is going to come out of Ukraine and Russia and the U.S aren't going to help us. And my only point is, I suppose, that, that there are ways out of this that are definitely not impossible, right? It's not like we have to suddenly start growing more wheat, or we have to tell people to eat less. We have the wheat, but we also have this sort of short term social game, which is kind of creating and propagating the crises.
And what I tried to emphasize in my book, when I was looking at these global prices is they tend to exaggerate the threat. That was what I kept on coming across. Is that what they always look to as worst-case scenario and because the way in which markets work through self fulfilling prophecies, they end up creating worst case scenario. Right? That's the great irony. And I suppose what I'm trying to say is we need to get away from our current way of pricing these things that's much more rooted in reality, and then yes, these cascading crises don't have to exist.
[00:22:30] Rachel Donald: Tell me if I'm going too far away from, um, the research in your book, but surely now, because of the climate crisis, um, and if we take away the meta parts of it, if we take away, you know, the energy crisis and we take -no, not the energy crisis. So we take it with the economic crisis. I mean, we are still in a position now where, um, governments and leaders and people are increasingly aware, it is going to be, there are going to be physical challenges in the real world very, very soon for us. And there already are in other parts of the world. I mean, in Southeast Asia, because of the huge deforestation, there is, there is flooding, there is not enough land for people to grow food. And even if they do have land to grow food, the weather cycles have changed so dramatically that it's dropping. You know, here, uh, people are going to be panicking in the next 10 years about how can they heat their homes, where they going to get their energy from, where they're going to get the finances to do that. So you keep calling it a social game, but surely the interesting and terrifying thing about the climate crisis and about the physical connotations of that is that this, I mean, this is different to every other time in history, isn't it? Like the physical feedback loop is going to be influencing that financial feedback loop as well.
[00:23:50] Rupert Russell: There's two sort of questions in that. So one is, I would say that, um, maybe I'll just be quick if I just took you through my climate argument. Um, and then you can take it apart and tell me why I'm wrong. And that would be great. I'm all up for it. Cause it is a controversial take.
So I'll let you get my climate argument then I kind of developed in the book. So I definitely went into this book wanting to write about, uh, food and climate change for all the reasons you've mentioned.
When I started talking to people in this field, I found something out that I found a bit counter-intuitive. So we often talk about this idea of kind of the climate wars or the resource wars. Um, the sort of mad max style fights over resources. Now those are already happening, right? So I went to Ghana, Northern Kenya where pastoralists do actually live off the land, right? So you have a herd of goats and you have to kind of, uh, negotiate access to certain grazing grounds, water sources for your, uh, for your goats. And this is, you often live directly off the milk. You can also trade them as well, uh, for money, but it's, it's really very much you're living off the land. And of course what's been happening with climate change, and it's been documented by really dozens of different studies on, on this part of Africa, um, is that as climate change makes the, uh, rainfall more volatile, more unpredictable as you have desertification, um, the resources that your goats or your other capital have to live off the land are shrinking, and that's bringing rival tribes into increasing conflict, right? If you see pictures of this, so you've got these people with goats and AK47s, right? These are the real climate wars.
Now the interesting thing is because it's so difficult, right, um, people are leaving this, are leaving the rural areas, right? Actually, these, these uh, agrarian style conflicts are actually diminishing because of it. Right? So in one sense, climate change is making the conflict worse, because it's making it worse it's leading to migration out of the rural areas and toward cities. So this kind of idea of fight over resources, a) it's already with us. But the second thing is it may not represent the future of the climate conflicts. It actually may represent our past.
And so I sort of did what many of these, uh, uh, people do. They migrate down to cities, such as Nairobi, and they live in slums, such as Kibera, Africa's biggest population, 1 million. And what happens in the slum? Well, then you go from living off the land to living in a market, which is a social game thing I keep referencing, but you've got to now have a job to earn money, which you then go to a market and buy food.
Now, suddenly you are now plugged into the international commodity markets, right? The amount of money you're paying for grain for maize, whatever it may be, that you're, that you're eating is being set by these kinds of global prices by speculators in New York, London, and so forth. So they're entering- they've kind of left one climate conflict, but my argument in the book was they're actually entering another one. They might not know it necessarily because it's difficult to observe how global markets work, and it was sort of what I spent a huge amount of time myself to figure out. And then it's then like, okay, so what's driving these, these global prices.
Now, I interviewed somebody who had a tech startup, who was basically trying to predict harvest using satellite data. So you can get all the satellite data from the European space agency and NASA, you feed it into an AI machine learning algorithm, and you can predict the harvest, right? So they've got 20 years quote, unquote, photos of the world. And you can then correlate that to what you know, uh, food production was, and then from that 20 years, you can then have a forward-looking view of predicting. Now when they went to go and sell this data to hedge funds, right, hedge funds are betting on the future prices of this agricultural commodities, you would think having kind of top-notch AI satellite data would be super helpful to them.
But they came back and said something to these startup people that really shocked them, which was, you know, we don't really care what the real, uh, what the real harvest is going to be, right. That's not useful to us because we're in a social game, right? We're betting against other speculators. And in speculative games is, as Cain showed, you really have to, what you're betting on is what everyone else is betting on. And if you have this kind of super secret information source, which no one else has, it's not going to be factored into their prices and then it's not useful.
So instead what they had to do with it, they got with a different model where they skewed all the data to predict what the rest of the market is looking at, which is these government reports. Say your listeners have watched the film trading places, the end of it kind of centers around this Florida co-op report for concentrated orange juice. That's literally what they're trying to predict. The exact thing they are in the, in, in, in, in, in, in the film. And what the startup found was if you look at Brazil or Argentina, or maybe it's Oklahoma, Texas, these kind of local government reports tend to bias themselves in a particular direction. So maybe it's plus 6% minus 7%. And so what they would do is that then adjust the correct data to incorrect data that would reflect these.
Now I spoke to another, uh, an actual commodity speculater and he said to me like, look, the problem with all the satellite stuff is that, that point aside, it's not relevant, right? So because there's so much wheat being produced in the world, if there's going to be a global shortage, we're going to know about it, right, you're going to see wildfires in Russia, you're going to see a drought in the American Midwest. It's got to be like a continental scale event to actually dent food production, wheat production, rather, in a meaningful way. But what's ended up happening is that because these hedge funds, these quant funds, algo funds are looking for any data sources to trade on, they are trading on the satellite data, even though it's actually not that useful. And because everyone else is doing it, it ends up injecting huge amounts of volatility into the markets.
And so to sort of spell this out, what this means is say, you've got, you know, um, a drought in Brazil, this gets picked up by a satellite, fed into a hedge fund, many hedge funds, but these algos, and this is like flashing red, right, buy futures buy wheat buy wheat buy wheat. This higher price then gets transmitted around the world to kibera where we have our people who are fleeing one climate war. And what I wound up arguing was is that they've actually got ensnared in another war. Because actually these hedge funds all compete against each other and they're using sort of satellite data or whatever it may be as kind of super weapons and it's creating enormous volatility.
And so you end up going from people experiencing the physical effects of climate change on the ground to experiencing it in a completely different way in this kind of social game where they can be impacted by a climate event on the other side of the world. Right? So my point is, is that we do, we don't need to think about climate shocks creating chaos in a direct one-to-one way. We might think of light flooding in Bangladesh as being an obvious example of that or desertification in Sub-Saharan Africa. It doesn't need to be like that. You can have local shocks creating global crisis because of the way that we've constructed our global markets.
[00:31:32] Rachel Donald: Yes, Yes absolutely. Absolutely. I mean, this is a, this is a systems podcast, so yes. Still, I still want to focus though on that question of, like, how is it, how do you think now given the physicality of the climate crisis, whether it's local or whether it has been a global effect, and then also the globality of the markets and how these things now interplay. Uh, what is that feedback loop going to do to people around the world?
[00:32:00] Rupert Russell: It's going to be an engine for, for migration. So the other chapter I did on climate change, there's three. I did one chapter on Guatemala. So I went to Guatemala, which is a long-standing, even one of the most climate at risk parts of the world for decades, right? Since they started creating indexes of countries, a climate risk, Guatemala and other central countries have been at the top.
Now, the staple crop, or rather the big export crop in Guatemala was coffee. Um, and in 2018, the coffee prices collapsed globally. The global price of coffee really, really shrink. Now, when I went there and spoke to sort of farmers that the climate change aspect of this had the effect of increasing their costs year on year. Right? So because of changes to the rainfall and air pressure, it's essentially promoted a fungus, which they called La Roya or rust, right, which grows on the plant, and you've got to buy fertilizers to get rid of the rust so that you can actually sell your crop. So the climate change thing has been this ongoing, longstanding, steady increase in cost for them.
You then have an external market shock of a collapse in coffee prices in 2018. Now these farmers fund back their harvest by taking out loans, some local money lenders. They essentially mortgage their home and their land to get a loan charged around 10% interest a month. Right. It's absolutely extortionate. So they're extremely sensitive. Right. You've got rising production costs and climate change. You've got interest going to these local money lenders and your whole livelihood depends on this international price. And what happened in 2019 was that essentially the low price meant that equation didn't work for people.
So people were suddenly, not only would they not make money from the harvest because it was below costs, they couldn't pay the interest on the loan. So you actually, you lose your entire farm, right? So this is absolutely devastating for people. And so that is why you suddenly saw hundreds of thousands of people from these coffee producing regions go to the U.S border. And this became the U.S border crisis.
And this is the way I think that we need to think about these things in the sense that you've got the one thing that all chaos creates is migration, right? Whether it's a war, drought, a crisis like the one I just described in Guatemala. And these have an effect not only of creating human suffering for the people who are having to move, obviously, but it also creates unfortunately political crises often in those countries. Right? So the UK now is doing this, like totally been a bizarre sort of sadistic plan to send people to Rwanda, the U.S you had this phenomenon of so-called kids in cages, Trump's theatrics of kind of cruelty. And so the way in which I sort of think about, which I think we have to think about these climate shocks is the way in which they upset these, these, these social games that we're playing might be sort of markets, which these Guatemalan farmers already caught in a kind, they're already caught between like the local money lenders and the international markets. Now they've got climate change to think about.
And the metaphor I tried to use in the book for this was the edge of chaos. It's a phrase that comes from chaos theory. Unfortunately, the billions of people live right on the edge, right? You didn't need a big climate shock. You don't need a physical, it may make a compelling photograph to see somebody's home sunk underneath water, but it could just be a slight change in rainfall that leads a 10% drop in your income. And you might think 10%, that's not too bad. Right. Maybe you cut back a little bit. Maybe you've got savings. Maybe an NGO can come in. But if you're mortgaged up to the hilt, that 10% can actually be totally ruinous for you.
And then what happens is, is that chaos and migration ends up going into sort of other countries. And so what you end up getting is these kinds of cascading effects. And so, the point that I'm really trying to emphasize is that, is that when we think about climate shocks and the climate crisis, we have to ask ourselves, is the social system, and by that, I mean like the political system, the economic system, so forth that we have on earth as human beings, is it, is it, is it working to fix this problem or making it worse?
And so it's got this amplification effect whereby the cost of climate change were actually amplified without even getting into the cause of climate change. The negative impacts unfortunately, are being amplified by, by the global markets and the political systems that we have.
[00:36:29] Rachel Donald: Yes, absolutely. I mean, and that kind of brings you back to my, my first, uh, question, which we sort of danced around, which is, you know, cause I think what we're seeing with Russia and Ukraine is, I think that 1% of, of drop in wheat production is going to have a terrible effect because of the bigger picture of the fact that it's countries where they're already on the edge of chaos or climate crisis that are experiencing droughts, that don't have the capacity to create their own food production in the way that perhaps they did 10 years ago and then are equally being squeezed by a market that wants to financialize everything, um, even the green economy. Um-
[00:37:03] Rupert Russell: I agree with that completely. I suppose what I was trying to argue maybe in, in, inartfully is that, is that it's, is it, that is not necessary, right. There are steps that we could take in the U.S and Europe to ameliorate that.
[00:37:18] Rachel Donald: Let's talk about the steps.
[00:37:19] Rupert Russell: I suppose that was maybe inartfully put, it's not a necessary crisis. It's the way chosen to construct our economic system that has created a crisis that we don't need.
[00:37:28] Rachel Donald: And I think that is such a fantastic term that I don't think I've come across before and question, which of these crises are necessary, um, because the term crisis is so, it's alarming and it should be, it should be alarming. This is a very alarming, uh, period in history. But nonetheless, to ask whether or not it's necessary really does put the emphasis back on the fact that so many of these problems are absolutely manmade and anthropogenic in their nature. So let's talk about solutions then. What, what can U.S, Europe, uh, UK do to, to combat what's coming, to change how we're structuring or our social game, our markets?
[00:38:08] Rupert Russell: Well, I think we need to root them in reality. As I said, you have these the way in which speculation ends up working. And there are many different speculative strategies. And over the course of the book, I kind of interviewed different speculators and go into each one and try and figure out how they work and what the effects are. But the end result from each of them tends to be an amplification effect, right? So you, you tend to be amplifying, um, what would have been a small dent in prices, right? So say there is a drought somewhere in the world, you would see a dent in supply that would just underneath normal circumstances create a slight rise in prices. And the way in which we're amplifying them is turning that small rise into a huge rise.
That's actually relatively easy to fix. It could be done at the stroke of a pen. In fact, they try to do it as part of the Dodd-Frank legislation. I think in 2011. And essentially, what they were doing, and unfortunately it wasn't implemented or still hasn't been implemented, was to change who dominates commodity markets. So Roosevelt's era up until 2000 when Greenspan and Clinton did away with those regulations, the commodity markets are more or less rooted in the real world. Right? So what that meant was that the people forming the prices were the people who were trading physical commodities. So it could be farmers, oil refineries, oil men, jet airlines. People were dealing with real commodities in the physical world who are rooted in them and these are the people who are, whose trades are really forming price formation. And you had 20% of the market for much of the 20th century was speculators and they formed an important role, which was to provide a liquidity. Right. So all that really means is that you're kind of pumping in a bit of capital into the system to make sure that a farmer has always got somebody to sell his or her wheat to, right?
Because many of these businesses are quite cyclical. And so you just want somebody in there to kind of grease the, grease the wheels, and they performed an important function. And I think the market's actually performed remarkably well. When you think about, uh, just take oil, for example, you had two external shocks in the seventies, the OPEC embargo in 1973, Iranian revolution in 1979. Once those died down from the kind of early 1980s, right, oil prices are incredibly stable.
At the same time we saw a Gulf war, the collapse of the Soviet union and the rise of the Asian tigers. There was real world volatility, but the markets remained pretty smooth. Now we could go back all the way back to the 1990s, right at the stroke of a pen, and we could at least calm down some of this volatility.
Now, the problem with even markets that work in an orderly way, the way economic textbook may want them to, no guarantee that the, uh, price being sold in them in a market can be affordable to somebody. And that's why you're seeing a lot of NGOs now just do direct fund transfers, right? So this is kind of crucial. We need market interventions on the consumer level to make sure that, you know, poverty never reaches a point where people can not afford to pay, to pay the prices. There's a third aspect of this, which I think is gaining steam at the moment, but I personally think is very ambitious, which is to have a kind of new Bretton Woods style agreement.
So the original Bretton Woods agreement, at least in Keynes' for formulation, had three institutions. Two of them we end up living with today, the IMF and the world bank. There's actually supposed to be, at least in Keynes's formulation, a third one that was uh, regulate commodity prices and it would do that by having stores of actual physical commodities.
So these stores, I was mentioning being held by the U.S and Europe. They could be held by a kind of third party so that when the prices do go up, they can kind of act as a guarantor. And because so much of markets are around expectations, if you have an expectation that a third party, you can always step in a bit like with bank runs, right? If you know the bank of England or the fed can step in and support bank, they kind of that self fulfilling dynamic ends up sort of becoming extinguished.
So there's a lot of push now amongst some policy circles to create a kind of global commodity stabilization institution. Uh, the fourth one is I'm most interested in, which is looking at regulating kind of global commodity prices directly through the federal reserve, right. So the federal reserve is already mandated to regulate inflation through interest rates and other, other tools. Uh, there's some interesting research I've been seeing that shows that in fact the mandate of price stability could be extended through to commodity prices. And because the U.S is such a large commodity producer and because commodities are denominated in U.S dollars, the U.S has a massive outsized role that they could play in terms of the global markets.
So I think the, the, the key answer to your point is, to sort of summarize it, is we have to clamp down on speculation. We need to make sure that people can always afford the international prices, whatever, whatever they may be. And third, we need to sort of have some kind of institution, whether it's the fed or new institutional one that can kind of have a reserve that can kind of create confidence in the market. And also at times of crisis kind of release those reserves.
[00:43:38] Rachel Donald: So regulated capitalism.
[00:43:42] Rupert Russell: Well, we always, I mean, not to get into a debate in terms of what is capitalism. I mean, markets have always been around right? The question is, are markets allowed to rule, right? I think that's also a big theme in my book is, is, uh, look to the rule of prices. And I suppose what these institutions would do will be to say, no, markets aren't ruling, markets can have really important roles to, uh, literally move food around. Right? You want the price system to coordinate, um, high prices sometimes if they're not too high, can be a good thing because it incentivizes merchants, independent actors to get the food where it's needed. Right? But what we don't want is prices or economics to be in charge. And that was sort of the idea of this idea of Bretton Woods, where it came from was it was about saying we're going to put politics in charge. We're going to have a policy and the policy is going to be: people need to eat. That's going to be the political imperative and we're then going to design our economic institutions from that imperative.
At the moment, it's the other way around, right? Now we have, uh, prices that are in control, economics is in control and that's dictating politics. You see this most clearly in Germany, right? Where their, where their dependence on Russian natural gas and economic dependence is really, limiting what they can do geopolitically. Of course, not just Germany, but the whole of Europe as well, because they have this dependence on gas. And that's been an also political decision of theirs. Merkel, decades of German administrations were very happy to have uh, cheap Russian gas and what's happened is it's ended up proving very expensive, right? As our friends in the climate movement have pointed out, right? Because, uh, the price of fossil fuels is artificially low. It doesn't contain the externality. Climate people want to emphasize the cost of the environment, the climate crisis and so forth, but there's also political costs, which they're now discovering as well.
And so my take on this is that we need to reorientate the way in which we've been thinking about politics, economics, and politics, democratic institution, make it first, and then design the economic arrangements that fall from that rather than the other way around.
[00:45:57] Rachel Donald: I may have misunderstood something here, but it seems to me that that is exactly how the world is organised. I have to pull a quote from your book, somebody that you interviewed, um, the invisible hand of the market is invisible because it doesn't exist. That prices do not form themselves, it's the speculation of people that run the markets and are profiteering from the markets, very much individuals and organizations and institutions.
So arguably if politics is any form of social organization, then it is politics that is dictating an economic framework, and the economic framework is simply that we live in an oligarchy and everything is built for that oligarchy to amass as much wealth and power as they can.
[00:46:40] Rupert Russell: What I meant to say is that it's been like a voluntary surrender, right? So the decision to put markets in charge is a political one, right? That is a political decision, but it's not one that can be unwound um, immediately, as the Germans are sort of discovering. They had two decades to make the right choice, more than, right? They've had decades to make the right choice politically. The green energy transition would have been my preferred option in 2012, Donald Tusk, then the prime minister of Poland said, you know, to sort of paraphrase, um, you know, the whole of Europe security now hinges on Russian gas delivery. This is like totally crazy.
He was ignored despite rising up the ranks of the European union. No kind of, despite these sort of dire warnings Putin was shutting off gas to, uh, Georgia and Ukraine through the 2000s. The Soviet union did this routinely to the Eastern block to enforce compliance. But there was a political decision, I sort of think of it as like a surrender to markets.
And there was a promise, right? So back in the old days of the 1990s, you know, there was a promise like with Tony Blair and Gordon Brown, for example, made the bank of England independent, right? What is that? It's basically saying we're going to hand over the most important levers of public policymaking to economic technocrats, right? These are going to be the neutral umpire, so who're going to set the rules of the game that the market and the state has to, has to abide by. That was a conscious decision that they wanted to do. They believed, I think sincerely, I think they were wrong by the way, but they believed sincerely that by making the bank of England independent, they would be rewarded by market confidence and this would lead to sort of investment, and then this would lead to an economic boom and so forth. The way in which I sort of described it at the end of my book, cause these really ended up becoming the villains by the end of my book is the central bankers as the umpires of the social game, right, the ones who are often changing the rules when it suits them, but who are supposed to be informing them, is that I sort of compare it to the independence of the military. Right?
So in many of these countries that we looked at, I looked at with the Arab spring revolutions such as Egypt, right? The whole Arab spring revolution in Egypt was about the military getting rid of Mubarak and his son and maintaining control of the country. Right? So often in these, in these dictatorships there's a kind of uneasy relationship between the military and the autocrat, and in the Egypt case, you really see it's the military who's in charge, right? So the military has dominance over politics.
I see it as being just as crazy, or just as what we have with central banks. Right? You could make all the same arguments for making, uh, military decisions independent of democratic governance. Right? You could say, well, politicians like to start wars because it's going to make them popular right before an election. And they like to do sort of saber rattling, and this can kind of rally the nation around the flag, but we would just recognize there's arguments is insane. Right. We would go, yeah. I mean, kind of in some version of reality that that does happen, but like, we're not just going to give the generals you know, unquestioning power over the security of our nation.
But yet, that's exactly what we've done with our, with our central banks. You've had this kind of voluntary surrender of power. And it was one that was done with either no or very little, um, public debate. And it's only in very extreme cases like the Eurozone crisis where a light is really shone on this, but most of the time, this is sort of happening, uh, happening anyway,
[00:50:23] Rachel Donald: Sure. Um, but the political infrastructure, I mean, arguably sort of just general social structure, um, Has been developed and fed, you know, that feedback loop of the economic institutions and the political institutions, which has ultimately created, you know, oligarchies instead, or like transformed democracies into oligarchies. Um, surely sort of creating more of those independent institutions then to like regulate the market is kind of feeding into the same problem, perhaps, potentially? Rather than giving, um, decision-making capacities back to the people, which it sounds like it was in Roosevelt's time when it was the people that were actually trading the commodities that were then regulating them.
[00:51:12] Rupert Russell: Well, it's a very difficult question. I mean, I don't know how to create uncorruptible institutions. I think, I think that it's a very interesting historical tidbit that I came across was that one of the big, people who actually opposed central bank independence was Milton Friedman.
in 1962, he went this is total madness to give all this power away to a bunch of bureaucrats. Right. And he said, well, who is going to stop these banks? It's people from finance and it's going to lead to, he didn't call it financialization because the term wasn't really around then, but he basically said, this is going to lead to the domination of a kind of financial interest group.
Of course, that's exactly what happened. It's exactly what happened, right. It's incredibly prescient. And that's also why, you know, during the early 1980s, uh, Friedman ran a kind of personal campaign to replace Paul Volcker with a computer, right. That was his whole thing. You just want a computer, that's basically deciding the money supply so that we won't have this problem of kind of, you know, corruption, undue influence in finance.
Historically, a blip in history, he actually came around and like loved Greenspan, so he wasn't entirely consistent in his own views. But even, but even Friedman understood, uh, understood how interest groups would sort of take over these. I suppose that, you know, we're not going to get out of a global market economy. That's just something which is seriously just not going to happen right now. We have to trade. Commodities are produced by certain countries. They are traded. We need to figure out a way to make those prices fair so that people can afford them, there's stability, people can invest.
I wrote another article back in January about the war on drugs and climate change. And telling, uh, my advice to climate activists was, you know, if you want to fight a war on a commodity, there's really only one way to do it, which is to replace the demand for it. Right? Because the war on drugs has been at the global war, fought by, uh, almost every country in the world. And it's completely failed. War on drugs, completely failed.
[00:53:22] Rachel Donald: Hm.
[00:53:23] Rupert Russell: The war on fossil fuels will not even have remotely that level of international cooperation, right, for obvious reasons. Um, and so fossil fuels obviously far more entrenched in our society than drugs are. The hill to climb is so much harder and the drug example should be a warning. And my argument was that, you know, supply follows demand and you have to cut demand. Rather than necessarily thinking about ways to sort of control energy prices. We really just want to get off energy prices completely, right. We want to, we want to transition to an economy where we're not having to import natural gas or coal or, or any fossil fuels.
And I think this is where this is where I think the climate movement really needs to assert itself. I think it's taken a back seat these last two months from the war, but it really needs to assert itself and saying like, look, if we have a fossil fuel economy, we're going to keep funding Russia, Saudi Arabia, Iran, Kuwait, the Gulf states. These are not great actors in the world, unfortunately. Right? There's a library of political science, economic research on the resource curse. We know these countries are not just bad to other countries, but they're also bad to their own people. The way in which we can correct this is by the green transition, which is what climate activists have been arguing for the last 10 years. And so that's also what I would really sort of, rather than- I take your point, you know, regulating, regulating fossil fuels isn't the answer. We need to sort of get off fossil fuels.
[00:54:56] Rachel Donald: Yeah. Yeah. Fossil fuels is such a tricky one because if you stop the use of fossil fuels overnight, like 4 billion people would die. And the capacity for renewable energy was simply, we have a lot of this argument on the, on the podcast that, um, transition isn't enough, but there also needs to be reduction, um, because we will never be able to produce enough renewable energy, uh, because fossil fuels is just such an explosive source of energy.
And so to do that in an, in a market economy essentially to say, we need degrowth, we need to contract our demand in a market economy is like a logical fallacy, um, which kind of leads me onto one of the final questions I wanted to ask you. Because my personal interest professionally is in the green economy, uh, and greenwashing and exposing all of the nonsense.
How can we use, and there might not be an answer to this, but from everything that you've researched and you've seen, how can we use prices to better understand, or perhaps identify the schemes in the green economy that are worth following and investing in and getting excited about, and those that are just speculative scams, trying to make money off of people's panic.
[00:56:11] Rupert Russell: If people are, if there are speculative scams, is actually, I probably think, on net benefit, good thing. Right? Because that means that people think there's energy heading in that direction. And people sort of want to, people kind of want to jump on it like crypto, crypto, and NFT. It's like, if there's a thing there's energy towards it. And like the other thing to remember about not just market economies, but any in economies, it's like a huge amount of waste. Right? So like for every great idea there's going to be 10 failed ideas. And so you need this kind of excess amount of capital.
I think the way in which I would think about this is sorry, just to answer the question quickly and I'll move on is, is that from what I understand it, you're really the expert on this, but you know, the prices of renewables things like solar dropped, right? So that price argument is now running in the, in climate activist favor. It now really is just looking like, as you sort of mentioned earlier, like oligopolistic, you know, cartel or oil companies, the sort of zombie institutions, which on a price level make no sense. And the hope is, is that just letting the market, do its thing will just destroy these companies, right? Because it's so much cheaper to produce things by wind and solar than fossil fuels, then you let the market do its thing and it will sort of be destroyed like the fax machine before it. Right. You will just see these as antiquated, not useful, uh, technologies. I'm obviously grossly simplifying here.
But the way that I would see in terms of where to put investments, I think what we're going to end up seeing as the political economy of this, um, is tricky. So the bigger problem I have with what you previously just said is any increase in prices or sort of degrowth or contraction is politically radioactive, right? So, um, politicians, poll numbers are very highly sensitive to commodity prices. That's my whole books about this. The whole book is sharing how the price of food and fuel, and also by the way, housing, have outsized amplify ,political impact. So even small changes in the price of gas in the U.S can have big changes on approval ratings. And so what you've had in the Biden administration really from day one is saying, we're not touching price. We're not doing carbon pricing, we're not doing anything that we could get as gilet jaune style protests, which Macron favored in 2019.
So that's a piece of just out of it. You've also got, unfortunately in the U.S case in particular political gridlock, right? Biden's climate plans were too small. Now they're not even happening all. Well, I think we're going to be looking to essential banks. I think central banks are the sort of the so-called money supply of the west. And they're very, very, very concerned about the climate crisis. They're very concerned about climate change creating another financial crisis, which takes a while to sort of get your head around. Um, and because they have all been scarred - had their careers made, rather, by the 2008 financial crisis. This is really what they spend their time thinking about is how it is, how to prevent the decline of financial asset prices. Of course, if you've got equities and the stock market invested in companies like U.S GDP is on the coast, right. That is a climate risk. Right. So that's exactly how they're kind of game planning this out of like how you can go from a flood in New Jersey to the collapse of local industry, to a banking crisis, and then a U.S or global or global financial crisis.
They've been really focused on this since about 2015. And by the way, these bankers, it's not a conspiracy. They just like hang, hanging out with each other. They have conferences, they share ideas, right? So all the central banks are now like producing these like green financing, transition mitigation plans. And you're going to start seeing, we've already started seeing it, we're going to start seeing a lot more, I think of green bonds and green financing. And this is where the capital is going to go. So we're going to start seeing a ton of capital moving into this sector. And then of course, on the other side, you're going to start seeing tons of investment coming in, BlackRock, asset managers, other kinds of investors.
I'm a little bit more optimistic. It's a bit like I, was, I kind of maybe said at the beginning it may be that we need to kind of throw way too much money at this. And yes, a lot of it will be greenwashing and scams. My hope would be, it will, some of it will kind of land where it is, it is productive. And even if the world wasn't full of scams and Grifters, which it is, um, that process would happen anyway. Like not everyone's idea is necessarily going to be a good one. Even the most enlightened state planners sort of couldn't figure that out. So if I have an optimistic side of me is that, well, if we are ruled by central bankers who are in some ways insulated from these, uh, political demands or the unpopular political debates around net zero and so forth, that their own kind of, uh, self-interest um, will lead them to kind of pump money into that sector.
[01:01:22] Rachel Donald: Yeah. And I, and I think that is what we are increasingly going to see, that right now we're seeing the, the smartest of sharks getting there first and thinking, how can I make a profit off of this? I think for me, the main concern with, again, looking to the market to fix the problem that the market essentially created, um, is that whilst we've got some time here in the west to figure out what to do, and we'll be largely buffered in many ways, by some of the effects, you know, already those at the front line, um, of climate change around the world are being, I mean, are just losing their lands and losing their food productions and losing their, their histories and cultures. And, um, I think that's a devastating effect
[01:02:10] Rupert Russell: This is first interview I've done where I've been classed as the defender of the market. I'm usually seen as like the arch enemy, but I've ended up playing the role and kind of defending markets a little bit. Maybe I've got Stockholm syndrome from talking to kind of hedge fund people. And that's fine. I accept that.
I mean, I, I'm not a political person. I'm not in the sense that like, I'm not an activist. I'm not somebody who comes up with policies or, you know, I don't run like an NGO pushing for these things. I'm not involved in that world. I suppose what I've tried to do in the book is identify almost like, um, a glitch in, in, in the game. Right. And the glitch is this deregulation in 2000. Right?
So my argument is, is that a lot of the chaos we've seen in the last 10 years just wouldn't have happened if we had stopped deregulations in 2000 and because their regulations, they could be changed tomorrow. A lot of the things that we're, that you know, where if you talk about these things and about either building nuclear power stations or building wind farms, this takes forever, it takes investment. We need, as you say, we need changes right now. There are people suffering right now. And I suppose there's an optimistic message from my book. It's that one piece of this, which is the extreme volatility of the global prices, which is how the majority of people are suffering from either war or hunger around the world, can be solved tomorrow.
Right. Obviously that's just the beginning of something, and that's, I suppose all I'm saying is it is, it is just the start. But, you know, pulling hundreds of millions of people out of extreme poverty and hunger is a great thing to do. And we should just do that for its own reason, even if there's nothing happening happening the next day.
[01:03:59] Rachel Donald: Yes, of course, absolutely. And a very important message to end on. Um, I think because I'm, I, in no way reading your book got any defense of the markets, I think it's an extraordinary analysis of the markets, of that invisible hand, which isn't quite invisible, um, and also paints a great picture of how the global financial system or model impacts on localized levels. It's, it's a really, really great book and everyone should go and get their hands on a copy.
Rupert, thank you so much for joining me on Planet: critical.
[01:04:30] Rupert Russell: Thank you so much for having me. It's great to talk about climate stuff finally, because it's obviously so important.
[01:04:36] Rachel Donald: Yeah, so, so, so important. Tell me my final question then, who would you like to platform?
[01:04:41] Rupert Russell: The last point that I was making, um, around central banks and greenwashing is really the real expert on that is Daniella Galbert. Do you know her, her work?
[01:04:52] Rachel Donald: No, I don't.
[01:04:53] Rupert Russell: She's the, she's the real expert. I'm just a, I'm just a kind of preface reader.
[01:05:01] Rachel Donald: All right. Excellent.
[01:05:03] Rupert Russell: To understand that she really gets into the nitty gritty of, of macro finance and greenwashing and, and, and how this all going. I don't think she has quite as an optimistic point of view as I do. She has a pretty searing critique of this and I'm sure, absolutely deservedly so.
I suppose my only piece of optimism is if not central banks, then I don't quite know what else. The political gridlock, especially in the U.S things are a little bit better country to country, although it might not feel like it, the political and the gridlock and the U.S is I think what worries me the most. It doesn't matter how brilliant your policy is or how the you've just got some people, you know, who we don't even need to name, who just say climate change is a Chinese hoax and that's the start of the conversation, right?
We're fortunate that the, uh, U.S institutions, be they the CFTC, that commodity futures trading commission or the fed, while far from perfect, and again, I don't want to be cast as their defender either, are full of technocrats and economists and political scientists, many of whom care deeply about these issues. And though they might be constrained by the institution they're in, I think a lot of them are doing really great work. Um, and my hope is that if politics is in gridlock, hopefully these people can kind of break through, um, and, you know, get some green financing to those who need it. Although I think Daniela might have a different point of view and I would definitely defer to her. So I, I hope she agrees to come on.
[01:06:39] Rachel Donald: Excellent. Thank you so much. It was such a pleasure speaking with you.
[01:06:43] Rupert Russell: Likewise. Thanks for having me, Rachel.
