Netflix recently announced it had lost 800,000 subscribers in the third quarter of this year. No surprise there, really. The company effectively tried to double what it charged consumers, and many instead headed for the exit.
In a rational system, prices tend to fall as time goes by. A version of the iPhone that once cost hundreds of dollars is now free, because Apple has unveiled a newer version that makes the old one less desirable. What goes up will, eventually, come down, one might say.
This brings us to columnist Steven Pearlstein’s Nov. 6 column in The Washington Post. He thinks our country is experiencing another bubble and prices are being artificially inflated. “Little did you know that it’s no longer the supply and demand for companies, houses, office buildings, natural gas or wheat that sets prices,” he writes. “More likely it’s the supply and demand for the futures, swaps and other derivative instruments linked to those things.”
Derivatives certainly proved to be a time bomb in the housing industry. Pearlstein thinks we may be heading for a similar fate in commodities.
“Because of a sudden desire to earn higher returns and diversify investment portfolios, there are more people wanting to invest in corn and copper and oil than there is corn and copper and natural gas produced and consumed,” he notes. “But no problem. The financial wizards on Wall Street have magically conjured up synthetic corn and copper and West Texas oil so that speculators can provide hedging opportunities for other speculators.”
It’s a fair concern. But the columnist’s mistake is to assume that we live in a pure market economy where “food was meant to be eaten, oil and gas to be turned into energy, and metals to be turned into cars, bridges and downspouts.” There’s a reason futures prices aren’t behaving rationally in several of these areas: The government is involved in picking winners and losers.
Corn may be the most important grain in human history. “We’re like corn chips walking because we really have a very, very large fraction of corn in our diets, and we actually can’t help it because it's an additive in so many of the foods we find on the market shelves,” Todd Dawson, a plant biologist at the University of California-Berkeley, told CNN.