Is oil going up in price partly because the banks have no capital left?

Ian Welsh at FireDogLake offers an interesting and plausible reason why oil prices are going through the roof.

Consider this. The world and especially the U.S. has spent the last three to four decades reorganizing our societies so that the extremely wealthy are able to extract money from the middle class and the poor. So what do the extremely wealthy DO with all that money? It is far beyond what they can spend on consumption, and besides, it is the basis of their exalted social status. They have to keep the wealth intact and even grow it where possible.

Investing all that money in potentially productive enterprises is simply too small scale and retail to be bothered with. Only large scale banking, far removed from the real economy and very much subject to government rules and regulations instead of economic success. Keep in mind that neither IBM nor Microsoft bothers with a market that has revenues of less than a billion dollars. They wait for someone else to prove the market and then buy them out. Entrepreneurs do not operate at the level of great fortunes. The uncertainty is too great for the investors with great fortunes to invest. They want only proven markets.

So where do the investors of great wealth invest their money?

See, there's a lot of loose money floating around in the world. Not only are the rich richer than anytime since the Gilded age, but due to the miracle of leverage you can easily take one million and turn it into, no joke, 100 million worth of speculative cash through the joy of leverage. Once you've got all that leveraged cash, however, you need to find something to do with it.

In the nineties that money went mostly into stocks. And so we had the dot-com bubble and the attendant frenzy.

Since then stock prices, if you measure them in Euros, have remained pretty close to flat. There have been some rises and falls, but basically, movement has been minor and soon lost.

Instead, in the 2000's that money split largely between four types of plays.

1. Labor arbitrage plays in which you move production from the 1st world to 3rd;
2. Real Estate plays, largely through the vehicles of mortgage backed Collateralized Debt Obligations (though there are other kinds of CDOs which also got great play) and other chopped up securities packages;
3. Currency speculation; and,
4. Commodity speculation.

Labor arbitrage plays are still ongoing but they're slowing down a great deal as the US economy moves into recession and as costs in China and the core areas of India increase.

Real Estate plays are over. All types of real-estate markets are collapsing.

The other two types of plays - currency speculation and commodity speculation remain available. So you've still got your billions and trillions of money floating around, because rather than allowing deleveraging to occur properly the Fed and other central banks are sweeping the junk into trash bins, and that money is still looking for returns. There are no great new industries or technologies to invest in that can soak all that money up doing useful things. Sure, you can put a few hundred billion into alternate energy, but that's peanuts. The rest of it has no where productive to go.

But it still needs to make returns. And there's nowhere for that money to go but into currency speculation (against the US dollar, not that the US dollar shouldn't be collapsing based on fundamentals) and into commodity speculation. And since there are some fundamental reasons why food and oil supply are down, those are good places to pile that money into.

Oil and food prices, based entirely on fundamentals, would have risen. China and India coming on line is raising the demand for oil significantly. Climate instability and stupid government policies like ethanol price support are amongst the factors decreasing supply relative to demand for food.

But neither of them would have risen as fast or high as they did without speculative excess.

If this is a correct explanation it carries with it proof that extremely unequal incomes carry a major social penalty. The high prices of oil, commodities and food are killing people around the world. No one's personal wealth is worth that social cost.