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Extensive analysis of food and oil prices argues that high demand and lack of supply are causing the inflationary spiral affecting the world. Apart from a good point about bio-fuels, these arguments are mistaken.
Commodities have become the latest financial bubble, in which trend following investment managers gamble on prices rising in perpetuity. Their gamble works so long as everyone else participates. It's the dot com/credit derivative story all over again. The evidence is in the comforting conclusion, "this time is different" which appeared a few days ago to justify higher commodity prices. "This time is different" is always a signal that a bubble is in progress. We believe the real cause of spiralling prices is central banks pushing liquidity at the financial system. This liquidity is being used by market players as only they know how.
There are, therefore, three ways to solve the food and energy price problem.
1. Stop bailing out the financial system. This will turn off the flow of easy money that is bidding prices up.
2. Ban investors from using exchange traded funds and similar tools to buy commodities.
Neither of these is likely to be politically acceptable.
3. Tax all financial flows into commodities via any type of financial future and give an equivalent tax credit to all exercises into physical delivery. This would enable genuine economic hedges to prosper while stopping the speculators who are so damaging to the world's food and fuel supplies.
Complete international co-ordination would be necessary to implement identical tax rates and rules in every financial market but this should be perfectly feasible. Taxing the speculation while excluding genuine economic uses will bring prices back to earth and provide the funds to rescue the world's poor. It will also, neatly, return some of the taxpayers money used in bailouts.
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