Are Prices “Engines of Chaos”?

In standard economic theory, prices are simply expressions of information about the scarcity of (and demand for) goods. But in his new book “Price Wars: How the Commodities Markets Made Our Chaotic World,” writer and filmmaker Rupert Russell argues that the modern era of algorithm-driven speculation has normalized unpredictable price swings in commodity markets and turned prices into “engines of chaos.” Russell joins Ryan Grim to discuss.

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Ryan Grim: This week in Washington, war fever fully took hold. At briefings this week, members of the White House press corps took turns trying to find new ways to push the U.S. into direct military conflict with Russia.

Newscaster: What Zelenskyy and other Ukrainian officials have made so clear that what they believe they need the most is more war planes and fighter jets. So why does the U.S. believe they know better what Ukraine needs than what Ukrainian officials are saying they need the most?

Newscaster: It sounds like we’re pretty dug in on our position when it comes to the no-fly zone when it comes to the MiGs. To put it bluntly, is Zelenskyy wasting his time tomorrow?

Newscaster: On the aircraft, just specifically: The Pentagon said last week that Secretary Austin said they do not support the transfer of additional fighter aircraft at this time. Is that still the United States’ position?

Newscaster: Would a strike in Poland on supplies or anything really automatically be met with a military forceful response, or is it really a conversation amongst allies about how to respond?

Newscaster: There are reports that a Russian drone made its way into Polish airspace before going back to Ukraine and being shot down. Does a drone into Poland count?

Newscaster: Is the President showing enough strength against Putin? If Putin were to use chemical weapons, would it change the President’s thinking when it comes to these MiGS, taking the no-fly zone off the table, but at least on this issue? Have you prepared? Can you give us any more details about what that threat means of severe consequences? The President obviously made the same threat last week. Is that purely economic consequences? Or would there potentially be a military threat?

RG: The risk of global nuclear war seems to be deeply unappreciated by the American press corps. That might be the most existential risk Russia’s war has created, but it’s not the only one that’s being missed. The pain people are feeling at the pump is impossible to miss. But all of these massive price swings are having — or are going to have — immense consequences that we’re not remotely prepared to deal with, whether it’s the surging wheat prices that will likely produce bread riots around the world this spring and summer, or collapse of the fertilizer market that will only make it worse.

In February, Rupert Russell published a timely new book: “Price Wars: How the Commodities Markets Made Our Chaotic World.” It got a brutal review in The Wall Street Journal and has been otherwise almost completely ignored. I’m hoping the Deconstructed audience can help change that because it’s one of the most important books of our time, I think.

The Journal review includes one of the most transparently idiotic paragraphs I think I’ve ever come across, and it formed the centerpiece of their resistance to the book.

So The Journal writes: “Mr. Russell assures us that his logic is ‘devilishly simple’ and that in commodity prices he has found his ‘butterfly.’ He means the proverbial insect whose wing flap leads to a hurricane. It seems that he has scarcely seen a butterfly that didn’t cause a hurricane. Price, he intones, can spark riots, revolutions and war. Prices unlock cages and release monsters. According to standard theory, prices are not a causal agent any more than newspapers or cell towers. Prices communicate scarcity or surplus or uncertainty. They transmit information. For Mr. Russell, prices are engines of chaos, they hide, spread magic, and manipulate, there are tools for the few to enrich themselves at the expense of the many.”

RG: OK, first of all, that’s not actually a fair rendering of his argument. But think about The Journal’s comparison points here of newspapers and cell towers. Do they really think that the advent of the printing press or the development of mass media or the Internet were neutral events or have no effect on society beyond the mere transmitting of information? Had they searched all of human history, they might not have been able to pick two worse examples in their effort to undermine his account.

In any event, I’m happy to welcome Rupert Russell to Deconstructed.

RG: Well, Rupert, thank you so much for joining me.

Rupert Russell: Thanks so much for having me.

RG: By the way, my colleague, Zack Carter says hello. How do you know Zack?

RR: I sent him the book back in the summer. But I’m a big fan of his book.

RG: Yes. For those who I haven’t told about it yet — I should have done an episode on it if I haven’t yet — Zack Carter wrote this terrific biography of John Maynard Keynes. Just an incredibly readable, insightful pageturner of a history of his ideas.

And I was talking to Zack about your book because he and I, back at the Huffington Post in 2011, wrote a piece that was kind of provocative at the time that basically blamed Goldman Sachs and Wall Street for fueling the protests in the Middle East that became the Arab Spring — although giving them credit if you want to see the Arab Spring as a part-positive development, which I would. And I guess I would split it this way: The protests are a positive development, but the pain and suffering that causes them are not a positive development.

And when I saw your book, I was fascinated to see a much more in-depth look at the way that banks, in particular, speculators and speculators in commodities have been able to monkey around with prices, and the absolute world-shattering consequences of those price shifts.

And I’ve been thinking a lot about that lately, in the context of Russia’s invasion of Ukraine, and the resulting wild swings in oil prices, and the massive disruption to other commodities, particularly wheat, which we’re only beginning now, I think, to see the fallout from that. The carnage in Ukraine is horrific, and the world is right to be concerned about it; the carnage that could result in an unintended way from the conflict, as a result of these kinds of spikes in wheat prices and other commodities, I think is not fully appreciated. And so that’s one reason I wanted to have you on to talk through this.

So thanks again for joining me.

RR: Thanks for having me.

It couldn’t be more timely. I mean, the book begins with that moment of the Arab Spring and the spike in wheat prices. And then it’s essentially a sort of a 10-year history, like almost up until the present day, of how there was this feedback loop between chaos in the markets and chaos in the real world, which sparks more chaos in the markets, and just continues and continues. And we’re seeing that exactly play out now.

You had rising oil prices last year. This, of course, sends an injection of cash into the Kremlin’s coffers. This emboldened Putin to put troops around Ukraine, and speculators then priced that in as risk, right? And then that also pushes up prices. And you have this feedback loop, so Putin feels even more emboldened. He knows the world needs his oil, he knows the world needs his gas more than ever. And then of course, the invasion itself, the risk becomes amplified once further, Ryan, and then we’re hitting $130 per barrel, I think just last week. And so the cycle is continuing.

RG: And your book came out a few months ago. And it didn’t precisely forecast this specific invasion. But it did certainly forecast this type of thing and is a prism through which you can explain it. And you also traveled to Donetsk, and I want to talk about that in a little bit.

But first, let’s go back to the beginning of the story. I think it’s smart to start in the mid-2000s, as you talk about the way that the major financial institutions, Goldman Sachs and others, have created these commodity indexes where investors’ pension funds and other speculators could dump massive amounts of capital and have it sort of track the price of commodities. They kind of sat there for a little while until about 2007 when you start to see real estate collapsing. That, of course, is the story that everybody’s familiar with: derivatives, mortgage-backed securities, subprime loans. We all know that one, but we don’t really know the connection to the rest of it.

And so as money kind of pours out of the pension fund, and other money pours out of real estate, it’s looking for somewhere to go and it floods into these commodity indexes. And you, all of a sudden, have more speculators pumping money into commodities than actual purchasers. And you had some stat that more ore people through Wall Street, were just speculating on wheat than the Chinese government was even buying wheat. And so the predictable result is a huge spike in prices; that then has this ripple effect throughout the world.

And have you read the book “Behind the Beautiful Forevers: Life, Death, and Hope in a Mumbai Undercity,” by Katherine Boo?

RR: I can’t say that I have, no.

RG: It’s so good. I highly recommend it. She follows a number of children for several years through their lives in slums in Mumbai. And the children, like all children around the world, measure themselves as they’re growing. And what she realizes is that their growth ends up being tied to commodity prices because their job, so to speak — 7-, 8-, 9-, 10-year-olds — is picking up scrap metal and selling that scrap metal. And as commodity prices spike, they’re able to afford more food.

And then in 2008, when you have this commodity crash that you write about, they actually like physically, literally, stop growing. You can see the way that these prices are filtering through the world and impacting everybody’s life.

So that brings us back up to 2010. Start us there: so Tunisia is where the Arab Spring really takes off. And we understand it as a fight for freedom, which it absolutely became. But as you write about, as Zack and I pointed out, back then the initial anger was around corruption and around bread prices.

RR: Precisely. That’s right. So you have one big commodity shock in 2008. You then have the financial crisis creates a global recession, then you have like a third shock, which is sort of the global food price spike. And you’re right, absolutely. Tunisia, Sidi Bouzid.

So I actually went on the anniversary of the Arab Spring back in 2014. And when I spoke to people there, I was there for a couple of weeks covering the presidential elections, and everyone was still complaining about food prices. They were saying: We thought the revolution was going to make life more affordable, and make life easier for us, and things are worse than ever.

And so I think the way in which to think about these commodity price shocks and food price shocks in particular, it’s kind of sparking an avalanche, right? So it begins in Tunisia, but very soon afterwards, in Egypt, actually a baker sets himself on fire as well, right? There was a self-immolation in Sidi Bouzid, there was a self-immolation in Egypt because he can’t afford the subsidized bread.

Now, it’s important to understand the reason why these prices are so politically volatile, or explosive, rather, is because they’re baked in, so to speak to the social contracts, right? So there’s kind of an implicit agreement between the sort of these autocrats and the people, which is okay: You give us the power, we get to maybe lavish our families on palaces and so forth. But we’re going to guarantee that you can afford to feed your family and the way in which they do this, they’ve done this since the end of the colonial period after the Second World War, is through bread subsidies, and also some form of wage or job guarantees as well. So the idea is that there is some kind of basic subsistence.

And so what you see with these protests is A) people are coming out holding bread, they brought signs saying: “Against corruption.” And these issues are all tied together, because they see the corruption as the reason why bread has gotten more expensive, right. And to be fair, it is corrupt, right? A lot of this money does get siphoned off. There are black markets for wheat and bread in these places. And so, prices are inherently political.

But what I found so interesting in these stories, and you can date this all the way back to the French Revolution, as well, with “Let them eat cake!” — this is an old problem. But there seems to be a kind of almost cross-wiring here. People tend to blame politicians for the price of bread or other commodities going up or down. You’re seeing it in Biden’s America right now. But really the players in this are the global commodity markets, it’s something which is happening outside of the state. And so it kind of creates a sort of fragility in the world, whereby the legitimacy of these regimes is ultimately dependent upon something over which they don’t have any control, ultimately!

RG: And I actually did want to quibble slightly with a couple lines you had about the French Revolution, because I actually think the French Revolution goes even further to support your thesis than you even spelled out in the book.

As you note, the political relationship between these prices, and the blame toward the leadership comes from that social contract, and often is chalked up to corruption by people. The reason that we’re getting screwed with these high prices is that there’s some type of conspiracy by the elites to profit off of our misery. And I don’t remember the precise details, but sometime in the late 1780s, the dynasty there did go through a liberalizing of the wheat trade, of the bread trade, and prices started flying all over the place.

And there were these conspiracies — and some true theories among people — that speculators were hoarding grain in order to drive prices up. And some of the bread riots were about bringing back the previous kind of subsidized and stabilized regime where every grower had to turn over a certain amount of crops.

So, in some ways, I felt like the experience of the French Revolution was even more similar to what we experienced in the 2010s than previously understood.

RR: Right at the end of the book, I actually delve into that case study you just mentioned. It got called “The Flour Wars.”

RG: Mhmm.

RR: So Adam Smith’s kind of cousin in France was Turgot and he was also this big free market thinker. And he thought the problem with France’s system, it was very similar to the Arab countries: you have a system of subsidies. One historian calls the king the baker of last resort, right? Like that was the function, right?

RG: Right.

RR: And the problem was, at the time, throughout the 18th century, the farms were basically just not producing enough food to feed people. And so even very small climate shocks by just one or two degrees could impact prices. And then that would lead to riots and revolutions. In the 80 years before the French Revolution, I think around 20 to 30 of them actually had major riot incidents, right? So this is actually a very present political problem that the elites of France were trying to solve.

And so Adam Smith had this kind of, as I said, intellectual cousin in France called Turgot — and his theory was, look, one way to get the farms to be more productive is to essentially liberalize, right? Let’s let prices kind of go up a bit. That’ll encourage investment.

But not only that, it means that say there’s a drought in León, for example, and the price of food spikes; it’s going to create an incentive for traders and neighboring countries, maybe Lombardy, maybe Britain, are going to kind of come over with a wheelbarrows of grain, and that will bring the price down — this elementary, economics 101.

And, you know, King Louis XVI, who would later be beheaded during the French Revolution, he actually tries this out, right? Early on, I think it’s 1774, he appoints him to enact this. And of course, it’s a complete, total disaster, as you say. There’s wild speculation, they have to deploy the army, they start shooting people, it’s just complete chaos and mayhem. And, of course, they called it the Flour Wars, right?

And he had a kind of shock doctrine sort of approach to this, right? He was going to do one big bang. And the problem was, is that not only did you have corruption speculation, but you just couldn’t have a free market, right? There just weren’t roads. There weren’t roads to transport this grain. And that’s actually a problem that we’re seeing right now, right? And we’re seeing American ports are filled up. The boats can’t dock.

RG: They had supply-chain problems.

RR: Exactly. It’s exactly the same problem you’ve got now. So the free market assumes a level of fluidity across the world or across the markets, which is incredibly fragile. And when it’s working, like it’s done for, to be honest, most of my lifetime, you kind of take it for granted. But then it’s sort of the smallest type of shock that sends it, stops it from working. And then you know, suddenly, we’re back to where we were in 1774. In that instance, they called the [indistinct phrase]. And that was what I call the first price war created by the free market.

RG: Right. And I did think that you made a very good point directly on the French Revolution, that there was this really terrible harvest right in 1789. And so there’s more actual material explanation for the price going through the roof than we have had over the last 10 years or so where there hasn’t been a shortage of, say, oil. There hasn’t been a shortage of commodities, necessarily. There’s no underlying reality that has driven these prices to where they are; it’s speculators who have pushed it into this place.

And you talk in an interesting way about the difference between reality and perception. And, in a way, perception in the financial markets becomes reality. Talk a little bit about your Anne Hathaway example, because I thought that that really crystallized it, in my mind.

RR: Yeah, sure. I spoke to quite a lot of people involved in finance on background for the book, and one person said: You’ve got to look into this. You want to look into Berkshire Hathaway stock prices. And it looks like — to us in finance, that is — that if you want to predict Berkshire Hathaway’s stock price, you really need to follow Anne Hathaway’s career. And if you look at a whole bunch of her films over say, a 10-year period, plus other events with her, like she was hosting the Oscars and things like that, anything that you could attach a kind of positive sentiment to all of those announcements — so maybe it’s box office releases, maybe it’s announcing her hosting the Oscars — they’re all associated with a jump in the share price of Berkshire Hathaway.

And so the kind of theory on Wall Street is essentially you’ve got algorithms, machine learning kind of bots sort of reading the news. And the speculative game is all about beating somebody else. It’s all about being the first mover to incorporate information. And so they’re less concerned about being correct than they are about being first. One hedge fund manager said that the philosophy is: Shoot first, and ask questions later. And they sort of build that into computers, right?

And so what ends up happening is you have these computers that are reading the news, and they’re attaching sentiment, and then they’re trading on it automatically. And I also think that’s what’s been driving a huge amount of volatility over the last couple of weeks where there’s so much news coming in, and you’re seeing this insane volatility in oil prices, jumps of $30 per barrel in a single day. And this isn’t based on reality. This isn’t based on any material change on the grounds. It isn’t, as you say, based on Russia shutting off oil deliveries. We haven’t really seen anything like that happen. And that’s actually why all the prices are now down again.

What this is about is about a social game identified by Keynes, and he called it the beauty pageant [contest]. And it’s kind of anachronistic, a bit misogynistic. But it was this idea that there was this game in a newspaper back in the 1930s, where you won by guessing who other readers thought the most beautiful woman was. And this is sort of what I’d identified as the logic happening in many of the case studies that I was looking, whereby what was important to speculators was not to be right, they often knew they were wrong, they were often asking certain companies who are giving them data not for the right data, but the wrong data that other people will be looking at. And then continuously, you see enormous volatility.

So in 2008, you’re right, you see a huge global spike in food prices and commodity prices and wheat prices. And that year produced more food than any other year in history. That was also true for 2010. In that case, the news was: Wildfires in Russia. So that was the dominating headline that kind of gets picked up not just by algo-traders, but of course, real-world, human-being traders as well. They start pricing in a global shortage, but also that year, the Americans have a bumper crop. So again, you don’t actually have a global shortage of wheat. But the prices of wheat that year nearly doubled anyway. And this is what I kept on continuously seeing. And I go through a number of different case studies in the book — looking at coffee prices, oil prices, and you see these massive overreactions. And that’s sort of why I saw — markets should respond to reality. That’s what we want them to do. That’s how they’re supposed to work. And to be honest, before the markets were deregulated in 2000, they actually did a pretty good job of being grounded in the real world.

But the moment those regulations were lifted, and speculators went from being around 20 percent of the market, or open interest, as it’s called in the jargon, to be around 80 to 90 percent, suddenly, when you see these huge swings, where you see massive overreactions, and as you mentioned earlier, that has just enormous impacts on the real world.

RG: Right, because they don’t have to be right in order to be right. They can be wrong and still make money. In other words, it is just objectively absurd that Anne Hathaway getting in a car crash is gonna have any influence whatsoever on the performance of Berkshire Hathaway. But because all the algorithms now know that there’s some link between the Hathaways, they know the other ones are gonna sell if Anne Hathaway crashes her car, so everybody else sells, and so they actually make money by being wrong. And that’s kind of funny when you think about Anne Hathaway, but not so funny when, all of a sudden, you’re living in Tunisia, and you can’t afford to eat anymore.

You also talked about the way that oil prices surged in 2014 when ISIS took over Mosul.

RR: Yeah.

RG: Even though, a) there was no reason to think that they were actually going to take over the oil production facilities nearby. But separately, there was no reason to think that they wouldn’t just keep selling the oil if they did take it over. And sure enough, there was no cut-off in oil supply. But because the news articles were read by these traders and algorithms as thinking that other people are going to find these women to be the most attractive, in Keynes’s example, then prices rise, and everybody gets rich, creating all sorts of chaos around the world, which brings us to the fallout from, the unrest that you write about. And that’s the Syrian civil war, and then the migration crisis. So can you talk a little bit about what you discovered about the links there?

RR: Absolutely.

So the way you think about chaos is either you can think about it as a butterfly effect, which we’re more familiar with, but chaos theory also kind of developed, and one of the metaphors or modern mathematical models they used was avalanches. And that’s continuously what we see. We’re seeing it play out now, right in front of us, right? But now it’s sort of being sped up.

So now we’ve got over 2 million refugees that have come out of the Ukraine in two weeks, right? It took several years for that to happen in the civil wars in Libya, Syria, Yemen, and so forth. So of course, you start with this food price spike, you have riots, they snowball into revolutions. The countries that, by the way, were able to sell oil, were able to upgrade their social contracts and essentially buy off their population. So, in particular, Saudi, Kuwait would be your key examples of that.

RG: And Saudi was able to go into Bahrain —

RR: Exactly. And then Libya is an exception, because NATO got involved. And then Syria is also an exception. They don’t actually have that much oil in Syria, nothing on the Saudi-Kuwait level compared to their population, but the Russians and other allies, Iran kind of got involved as well and kind of propped up Assad, when maybe like in Egypt in Tunisia, he probably would have would have been toppled.

Immediately you have, like with any conflict or refugee crisis, the first countries to get those refugees were neighboring countries such as Lebanon and actually also Tunisia and Egypt in the Libyan case.

But by 2015, 2016 that is when you have — the West wakes up because they suddenly started waving in Europe. And even though they’re not really in America, it gets broadcast in America as well. And you get all kinds of sensationalist headlines, images, it is sort of portrayed as a kind of invasion. And this is precisely the moment that you begin to see a right-wing populist surge all across Europe. And of course, it hits the United States slightly later, in 2016; it hits Britain with Brexit in 2016, as well.

And what’s so interesting is the way in which the fallout from the financial crisis, the austerity that the European governments were imposing on their people, was sort of converging with this kind of threat from barbarians at the gate, right? And so it’s like the pie is shrinking, and now these people are going to take it away from you.

And you had these populists who have been around for a long time, like the Le Pens have been around my whole lifetime, Nigel Farage has been around for, I think, decades now. But this was suddenly their opening. These are people on the margins, and suddenly the one issue that they have been going on about and also marginalized them suddenly resonated. You have an explosion in the financial markets, becomes an explosion in the Middle East, which then leads to the refugee crisis, becomes an explosion in Europe — and this is this kind of butterfly effect, or like an avalanche. And you can see how at each point it sort of becomes amplified, whether it’s through the commodity markets, social media, or global refugee flows.

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RG: You wrote about how bread in a lot of countries is not just essential to survival, but it’s a kind of symbolic representation of the social contract between the government and the people there. And in a parallel way, you talk about the way that housing and the value of housing stands in, in some ways, for bread in developed countries like the U.S. and that becomes, obviously, an essential part of life is to have a place to live. But it also becomes a symbolic stand-in for the kind of relationship between people and the system itself and your future in that system — like the optimism that you have. And you found some interesting data that Brexit was explained rather precisely by neighborhood-by-neighborhood property value gains.

RR: Yes. That’s right. I’m drawing here on the research of Ben Ansell, at the University of Oxford, who’s written a whole slew of just completely fascinating papers, where as you say, he’s able to take kind of granular data, so neighborhood by neighborhood, and looking at the change in house prices. And his sort of theory here on the social contract aspect is that when you’ve got, you know, 40-50 years of neoliberalism eroding the welfare state, so the state isn’t gonna provide security for you anymore, the house becomes that. It’s most people’s major asset. If somebody should become ill, or they can’t work, people think: Well, I can always sell my house. OK, it’s not what I want, but I’ve got a kind of nest egg there. Or after people retire, and they maybe want a bump on their pension, they can, again, maybe sell their house, move somewhere smaller, and they can kind of realize that capital.

And so it’s completely tied into people’s sense of security. And it’s also something that people look to the government to help them with. So people also look to the government to help them to either maintain prices or prop up house prices. And so when you start to see prices stagnate or decline, it provokes a very sharp political response, similar to what you’re seeing with gas prices, as well, which is maybe more familiar to people. But what Ansell was able to do was he was able to break down, as I said, neighborhood by neighborhood. And it wasn’t just looking at who swung to vote for Brexit. In this case, it was the left behind neighborhoods in Britain. So those are the neighborhoods that weren’t doing so well.

It was also true in the United States as well, those sort of almost paradoxical people who voted for Obama in 2012, and then Trump in 2016, that group was also highly predicted by this model of declining house prices. Now, that may seem kind of abstract, and jargonistic, and quite technical, but when you go to Detroit, a state — Michigan — that really went for Trump unexpectedly in 2016, you really see it, right? You’re like, wow, God, this place is stagnating, right?

There’s story after story for years after the financial crisis about not being able to give homes away. Some of the neighborhoods look like scenes out of “The Walking Dead.” At the same time, you’re also hearing news reports of booming prices in San Francisco and New York, the coasts. So it kind of creates the sense of being left behind.

What I also found was that this housing inequality, right, so the booms in London or the booms in New York, were also connected to the commodity price shock. Because what the Arab Spring also did was it created uncertainty in the oil markets, just as we’re seeing right now, and this got priced in by speculators, and this created a bubble from 2011 to 2014. And a lot of these petro dollars get recycled in real estate. So you may be seeing protests in the news at the moment in London, people going and squatting at oligarchs’ houses, right? That’s just a very visible, kind of showy version of it. You’ve also got things like Norway’s sovereign wealth fund is also buying up tons of London as well. And not just London, but New York, San Francisco as well. It’s kind of a safe haven for financial assets.

And so you can really kind of connect the dots between oil markets, financial markets, housing markets, and again, these massive political earthquakes that they trigger. And what my book was trying to do was trying to tie together these little bits of research that already were out there, such as Ben Ansell’s work and just kind of tell one big story about the decade.

RG: Yeah and you talked also about prior to that, from 2002-2012, you had some data on what is estimated to be the excess amount of oil profits that flowed to some of these countries during that period as a result of this move toward allowing pension funds and others to drive these prices up.

And you put it at $820 billion for Saudi; $580 billion for Russia; $230 billion for Venezuela; $290 billion for Iran, and on and on. But then you also talk about how Saudi Arabia and Russia in particular pumped that money, not just into real estate, which they also did, they’re not necessarily spending it on real estate, that’s their investment, what they’re spending it on his military hardware — building up their forces, which very quickly then end up getting deployed.

You went to Eastern Ukraine. You toured that area. What did you take away from that? And how has that shaped your understanding of the invasion and the war that’s going on now?

RR: Yes, I went to Donetsk, which is in this sort of breakaway, puppet state, the Donetsk People’s Republic.

RG: It was 2019 or something?

RR: Yeah. Right on the border, the winter of 2018-2019. And God, yeah, I wanted to see how these, as Warren Buffett calls them, kind of financial weapons of mass destruction ended up becoming physical weapons of mass destruction, and just sort of go there is to enter a kind of fantasy land, right? It’s set up as a puppet state by the Russians. Putin’s one-time chief propagandist, Surkov, himself a kind of mythical figure, was essentially put in charge of this originally. And so you’re kind of walking into essentially a Russian propaganda operation.

And I think the most striking thing about it was this idea that I had also heard about first in Iraq, but sort of haunted me everywhere that I went. So when I was in Mosul, which I had gone to prior, I met somebody who said: I live in a zombie apocalypse, right? I’m in between living and dead. My neighbors are buried underneath the ground — or they’re in Europe, who knows? Right? They’ve disappeared. By the way, as we’re talking there’s like a digger literally pulling out bodies from his backyard, right? So this is not like a metaphorical or abstract idea.

RG: Right.

RR: And this idea of a zombie existence of being in between living and dead is something which I also saw as soon as you go to Donetsk, right? People are getting into buses, they’re going to shops, but this place isn’t alive, there were no young people, the shops are boarded up. The people here were sort of trapped. I went to a sort of an underground bunker where some people had been living. And some of them had been there for years.

And here, you’ve got the same Soviet propaganda from when I suppose it was still built, must have been first built in the 1960s, right? It’s kind of an incredible kind of frieze mosaic around the top, paintings of missile launchers, and submarines, and so forth kind of looking down at us. And for me, that was like an incredible metaphor. It was like this was built in the nuclear age. This is the Cold War, the battle between communism and capitalism. Then, of course, we had the end of history, like in the early 1990s, the end of that conflict. And what has capitalism done? Capitalism has created these sorts of bubbles in the commodity markets, and it’s actually wasted a bubble here, underground, once again. And the kind of freedom and prosperity clearly never came through this place.

So for me, it was a fascinating look at how in which these kinds of abstract ideas around, whether it’s bubbles or weapons of mass destruction, you could actually see them sort of take on this, take on this physical form all around you.

RG: And it was interesting to see that all of the Donetsk people that you met, were parroting the exact same propaganda that you hear from Putin today. What’s wrong with Ukrainians? Well, they’re infiltrated by Nazis. And so we have to denazify them. So that’s been their line for years now.

And you point out the way that Putin’s aggression toward Ukraine really does correlate with rising energy prices. When he’s flush, he just feels like he has more room that he can maneuver. And you interviewed Cullen Hendrix, political science professor at the University of Denver, who has looked much more closely and granularly at the relationship between oil prices and conflict — which I found profound and disturbing. What did he find? And going forward — and this is why I’m so interested in this topic now — what does it forecast for us over the next couple of years?

RR: Sure. So Cullen Hendrix pointed out to me — I’ve been talking to him for a while, he’s also done lots of really fantastic work on food prices as well — but he pointed out to me: Look, if you look at Russia’s big military conflicts, right? Invasion of Afghanistan in 1979, invasion of Georgia in 2008, definitely the invasion of Crimea and whatever was going on in Donbass in 2014, these are all years of historically high oil prices.

Now, you could say, well, this is just a coincidence, right? Oil prices go up and down. This is only three data points. And so what he did is he looked at 50 years of conflict — you can get these big datasets that are readily available — and by conflict, they’re sort of looking at like, say China shoots down a U.S. drone, that would be counted.These aren’t like full-blown wars. That’s how they count it. And they’re called MIDs — militarized interstate disputes — in the political science jargon, and he punched that into oil prices over the same period. And yet, you see this absolutely striking correlation, it’s almost a straight line; as the oil price rises, the probability of seeing conflict started by a petro-state also rises.

And you kind of put this down to four reasons. And in my language, I call it the four locks that uncage the monster, right? I didn’t know what’s in Putin’s head, I don’t know what his motivations are. But the commodity markets sort of let him do whatever he’s wanted to do, they’ve given him that freedom. And that’s really the way to think about how these markets create chaos.

So the first one would just be simply, as we’ve already said, a windfall, right? You get cash, you can spend that on your foreign currency reserves to defend against sanctions. You can spend it on guns, tanks, what have you. It also acts as a shield against sanctions, because when prices are high, that means that by definition, allegedly, the commodity in particular — in this case, oil — is scarce. So it means that it’s more difficult, as we’re seeing right now, for countries to effectively sanction you.

Thirdly, it’s the gas weapon, which Russia has used really since the 1960s. Khrushchev built all these pipelines that ran down from Siberia into Eastern Europe, and the Kremlin from the 1960s till today has been using those pipelines to gain advantage, right? So when the Eastern Bloc was being difficult, they would suddenly raise the prices. And if they were in a crisis, and they wanted to prop up the regime, like happened in Poland in 1980 with the Solidarity Movement, they would actually discount the gas even further to kind of help give essentially a financial boost to the regime.

And Putin has done this as well. With all of these states in his orbit, he’s always raising or lowering the gas prices, or in some cases, shutting off. Belarus, for example, gets effectively free gas, because he just never pays Putin back. And that’s just sort of taken as a given. So when gas prices are high, which they were at the end of last year — actually extremely high — then the gas weapon becomes even more powerful.

And the third lock is sort of what this all combines into. And Hendrix has this great idea of chestiness. Right? So all these kinds of material things break a psychological barrier, right? So suddenly, people feel emboldened, and they feel competent. Of course, it’s slightly hubristic. And this is actually what sort of turns opportunity into action.

RG: When he was talking about chestiness, I was also thinking about the UAE in Saudi Arabia, who have just been on a complete regional rampage over the last seven, eight years, famously at war in Yemen, but also just messing around everywhere: Ethiopia, Somalia, they contemplated overthrowing the King of Jordan, they blockaded Qatar, and even contemplated a military invasion there. And I wonder if you think that the chestiness theory fits with the UAE and Saudi Arabia’s recent behavior as well, which flows into their kind of willingness to tell Biden to kind of go pound sand when he’s pushing them to do the thing that our client states in the Middle East are supposed to do in a global crisis, which is bail us out by pumping more oil?

RR: I think it’s absolutely true. And you saw it not just in the Middle East, but you’ve also seen it historically in Latin America as well: 2008, another, as you’ve mentioned, period of high prices also saw some chestiness then on Hugo Chavez’s part with his neighbors and with the U.S.

I will say, I think Saudi is almost a particularly special case. They’re absolutely the giant here. They’re always pretty chesty. But they’ve also had periods where they’ve needed the U.S., right? So back in the early 1990s, and also in the 1980s. And the U.S. Saudi relationship has sort of been, the interesting thing that came up in my research was how crucial Henry Kissinger was to the relationship we have right now. Kissinger, in 1973, OPEC doubled and quadrupled the oil price. Kissinger said: Let’s just bomb Saudi Arabia, and then the Saudi Arabian oil minister gave an interview to the New York Times and said: We’ll blow up our own oil fields, it’s fine by us, it’s going to send the price shooting up even higher. We’re the ones who are going to benefit from this.

And then Kissinger had to get essentially a crash course in oil economics from the U.S. oil giants. I think it was the head of Exxon, who said: Look, Kissinger, they’ve got all the cards, and he kind of struggled to get his head around this. But by the time he did, he came up with a kind of ingenious idea, which is like: OK, if we can’t beat the Saudis on this oil question, because they’ve got the oil, and we don’t, why don’t we make sure that their money ends up in America, and this is what gets called petrodollar recycling, right? So the American consumer goes to the gas pump, buys oil, that money goes to Saudi Arabia, and then Kissinger essentially helped figure out amongst other Wall Street bankers like Citigroup, how to get that money back into the US.

And they do it through essentially three things: Buying U.S. Treasuries, so essentially, then financing the Reagan deficit that kind of started happening was done with Saudi oil money; they buy a lot of weaponry, defense equipment; and they also invested, of course, in financial assets. So that could be the stock market and real estate.

And the way I pictured this was you can imagine there’s a kind of digital dance that takes place on Wall Street, right? The money may not actually even leave a U.S. bank. This has been a key way in which the resource curse is sort of perpetuated globally, as the countries — not just the U.S. — the U.K., in particular are very, very, very happy to kind of take all of this oil money from these regimes and sell them weapons instead. And, of course, that fuels this chestiness phenomenon. I mean, the the bombs that Saudi Arabia’s using on Yemen are predominantly made in the U.S. and the U.K.

RG: And you also visited Kenya, in your reporting. And I was particularly curious to get your take on that trip. Because one of the things I’m most afraid of is what the fallout of this war is going to be in Africa, which is heavily dependent on Russian and Ukrainian wheat, and doesn’t have a whole lot of room. If bread prices go up in the United States a bit, people would be frustrated, people are frustrated by gas prices practically doubling, and it does create unrest, but they seem much closer to the boiling point in a lot of these countries.

And you identified what you described as this index of when a country hits a boiling point of 210. I don’t understand all of the inputs. But could you explain a little bit about how these political scientists have gotten to the idea of when basically, bread prices, or other prices, can get a country to a boiling point, and how much risk there is of that happening, particularly in Africa as a result of this war?

RR: Sure. So the boiling point idea comes from Yaneer Bar-Yam’s research and his colleagues at the New England Complex Systems Institute in Cambridge, Massachusetts. And they were looking at the double food price spikes of 2008 and 2010. And they use some sort of fancy mathematics from complexity theory, which is sort of related to chaos theory, called phase transitions. So it’s the same mathematics that takes you from 99 degrees centigrade on some water — it’s warm, but it’s kind of just there in the pot — and then this one degree more, suddenly, it’s boiling, and you got this miraculous transformation where liquid turns into steam and it escapes out of the pot, and it goes all around your kitchen, right?

And so they use that same mathematical model, and they basically applied it to food prices. And the way in which food prices are measured globally is actually by the U.N. And they essentially take an average of food commodity prices to create this index. And it allows you to compare one country to another.

It’s very, very worrying that, right now, we seem to be shooting way past that 210 threshold. Now, in the commodity markets in the real world, there’s not a one-to-one correspondence. So the way in which it kind of gets filtered through global supply chains, and of course, government subsidies, and literal shortages of wheat, which you might also be looking at if this Ukrainian harvest can’t get out of Ukraine, to the people that need it, and particularly in the Middle East and Sub-Saharan Africa where a lot that wheat is destined.

There’s multiple problems here, right? First and most important is hunger and poverty. This is already been happening, by the way, during the pandemic. So you’ve all already seen food-related riots and enormous spikes in hunger and poverty throughout 2020 and 2021. Kenya actually was one of those countries. So a lot of the world is actually already in the middle of one of these tsunamis of hunger and poverty. And now it’s just going to get an absolute, complete ratchet up.

Now this is if we do nothing, right? So it’s really important to also state that the U.S., China, other major economies have enormous reserves of wheat and other foodstuffs which they can release, right? You saw Biden releasing oil last year, and again this year in order to help bring down the oil price. If there really are physical shortages in these places then it’s absolutely crucial that essentially the rest of the world steps in and steps in essentially now to make sure it’s on cargo ships, heading to the places where we need it.

What I discovered in Kenya — there’s three chapters on climate change and this is one of the case studies — is essentially how climate change plays into the story. At least in the short-to-medium-term, it’s not so much that’s altering global food production. Of course, it’s going to impact it and I don’t want to downplay that. But I think what it’s having an even bigger impact on is that it’s stopping people from living off the land. So those people who are really living as sort of goat herders, or cattle farmers, or doing different kinds of subsistence living, which is of course, common throughout Sub-Saharan Africa, are already finding they can’t feed their families doing this. And so it’s driving mass migration to urban centers. Again, this is already underway, this process. It isn’t like some future prediction. This is happening today. And so what I did is I went from these rural areas with these goat herders who often have to defend their cattle with guns. It’s not a great life, and so many of them are going to urban centers, such as Kibera in Kenya. And these essentially are super slums, right? So the Kibera barrier, I think, is one million-plus people.

And now you go from essentially, in the rural, where you were living before, you were living off the land, now you’re living in a market. You’ve got to earn wages, you get paid, and then you have to buy food in the markets. And so, in fact, the people who are vulnerable to these commodity price shocks are growing. So the pool of people who can be impacted is far larger today than it would have been in 2008 and 2010, precisely because the superstorms have been growing thanks to climate change.

RG: It seems like it was a world historic mistake to allow — I mean, I’m using mistake loosely because it was done on purpose — but to allow these massive pools of investments to park themselves in commodities. This is one more mistake of the post-Cold War 1990s liberalization of everything.

Is there any push to undo this? Can this be disentangled? Because the world has too many real problems to deal with to also have to figure out how to deal with these fantastical ones that speculators are just making up.

RR: Absolutely. There was, from Dodd-Frank onwards, there’s been a push to re-regulate the commodity markets, to rein in speculators, to go back to that original function of essentially providing liquidity or essentially hedging risk for farmers, oil producers, copper miners, whatever it may be, which is what they did from the Roosevelt era until 2000. That’s been caught up with all kinds of litigation and lobbying, and they still essentially don’t have, I’ve been told, a decent rule on this to actually reign it in.

RG: Right. The law passed in 2010. And here we are.

RR: Precisely.

RG: Without the rules in place. Right.

RR: But I think that even if that were to come in tomorrow, and we still had a world organized by the commodity markets, we still may end up in this situation we are in today, right? Because although the market is extremely volatile, currently, essentially, there’s too much uncertainty, right? That’s why you’re seeing the volatility. We don’t know if there will be oil coming in and out of Russia. And that’s why one day oil is $90 and the next day, it’s $130.

A lot of that is based on the real world, right? So a lot of these predictions could end up happening. What we really need is a green energy transition, right? It’s not a question of regulating the markets, it’s a question of coming off the markets, right? To have an analogy here, I wrote a piece for Time on the War on Drugs and this. It’s a kind of analogous thing. Regulation would be like going on methadone. You want to get off heroin, you want to get onto methadone, it’s like a step. But really, you want to cut the addiction off altogether, right?

We shouldn’t be importing any oil or natural gas from Russia, or to be honest, anybody else. We should be living in a green economy. And then all these issues that we’ve been talking about, whether it’s Saudi’s aggression in Yemen, whether it’s the war in Ukraine, these just simply wouldn’t be funded, right? These economies would have to figure out something else to do, and you couldn’t essentially run these kinds of gangster states, which they’re doing.

So, in the short term, especially for food, yes, absolutely, we should have that 2010 legislation implemented properly. But as it’s looking even more urgent than ever, we’ve just really got to get off the resource curse, which has been completely obvious to us ever since Carter put solar panels on the White House.

RG: Right. Right. Which has a huge influence on wheat prices, too. They are heavily driven by the energy that it takes to grow wheat, so you’d see stability come there, too.

Tell me what you think of this: You would still have commodity wars, commodity conflicts, over the commodities needed to produce the parts and elements that go into clean energy, but they wouldn’t have the same immediate effect, and the same wild swings that they have now, would be my forecast. What’s your take on that?

RR: Yeah, absolutely. As I said, the volatility is, by itself, terrible.

For another chapter on climate change, I went to Guatemala and I spoke to coffee farmers who essentially had seen rising costs year on year thanks to climate change, which has been essentially kind of making this fungus on the plants more prevalent, called rust. So that increases their costs of fertilizers. That’s fine if the price of coffee is also increasing, right? But in 2018-2019, the coffee price collapsed, and so suddenly, you had hundreds of thousands of farmers — most of whom had taken out loans to fund the harvest through local money lenders by mortgaging their land — essentially faced personal bankruptcy. And that’s what caused the U.S. border crisis. That’s why it was all coming from Central America. And that’s why it was all hitting the United States in 2019.

So what we really need is stable prices. We need a mixture of price controls, whether that’s subsidies, whether that’s people controlling supply and demand. We’ve done this throughout history many, many, many, many times. We just choose not to do it. Right? Or rather, the vested interests who profit from this volatility have stopped the legislation from coming to fruition.

RG: Yeah, no doubt. This war is making many more millionaires, that’s for sure.

So Rupert, thank you so much for joining me. Really appreciate it.

And the book, again, for people, is called “Price Wars: How the Commodities Markets Made Our Chaotic World.”

RR: Great. Thanks so much for having me on.

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RG: That was Rupert Russell, and that’s our show.

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