Letter 2 America for September 17, 2013

Dear America,

I have written many times about a dichotomy between two types of wealth: what I call natural wealth and artificial wealth.  And as time goes by, more and more news related to that distinction emerges, the latest being an article on the front page of Sunday's New York Times about ethanol credits.  At the outset, I have to concede that my interest is a function of my interest in the broader topic of the legitimacy of methods of acquiring wealth and the actual definition of wealth ab initio.  Put concisely, my opinion is that when one's business is siphoning money off the economy through speculation, one is not creating wealth; he is just moving someone else's from that person's pocket to his own.  Also in my opinion, that is only marginally on this side of criminal.  So when someone buys oil futures not so that he can have access to oil at a fixed price but so that he can sell those futures when the price goes up, he is taking a portion of that oil...stealing it really...and arrogating the wealth that it constitutes to his own use while creating or giving nothing in exchange.  And while those who indulge in such practices--often resulting in the amassing of huge fortunes--profess to be just hard working businessman, to my way of thinking they are just highwaymen whose profession has been legalized by those who make no distinction between productivity and wile, between well and ill gotten gains.  The Times article is related to those ideas.

In an effort to deter producers of gasoline from selling gasoline without diluting it with ethanol--setting aside the fact that the use of ethanol in lieu of gasoline is controversial in and of itself, which is another issue--federal law makers created the ethanol credit in the form of the RIN (Renewable Identification Number) and effectively an opaque, over-the-counter market in which to buy them; producers have to buy these RIN's, each one assigned to a single gallon of gasoline, from those who have excess credits if they do not blend their products with ethanol and do not want to incur penalties.  And you would think that the logical way to administer such a system would be for the EPA, for example, to be the clearing house for those credits, and thus to monitor their use and confine it to the intended purpose: inducing use of ethanol, a renewable, domestically produced fuel, in lieu of petroleum, much of which we must import.  If such were the case, there could be regulation of ownership of RIN's and there would be no middleman to skim profit off the top of the commercial value of the credits, but when the credit was created, no such provision was made.  Mind you, there were fears expressed widely that investors, including large investment banks trading for their own profit, would hijack the market for RIN's.  In fact however, ethanol credits are traded on open commodities markets in which anyone can buy them and sell them, apparently including Jamie Dimon's J.P. Morgan-Chase, which is right in the middle of this money-making scheme.

Those who engage in such trading would certainly claim that they are just making money when in fact they are not making anything, but rather are...again...siphoning value off of the credits they trade, thus making the gasoline produced with those credits more expensive as the credits are in effect one of the raw materials that are used to produce gasoline, just like the ethanol they represent.  If a gasoline refiner buys credits at a price five cents a gallon over what those credits were sold for, the cost of the product he refines is increased by five cents, and to put the cost in perspective, the cost of a RIN went from $.07 in January to $1.43 in July according to The Times.  We pay that price at the pump...or those in other countries to which over 100 million gallons of gasoline per day are shipped from our Gulf Coast do.  Thus, some gallons of gasoline produced in that period of time cost almost an extra dollar and a half, not because of governmental taxes but because our financial markets imposed that "private tax," so to speak, on us.  The question is, if the traders in ethanol credits added no value to them or to the ethanol that they represented, what economic policy is served by the profit they made.  That is, indirectly, what the Times article is about.  These credits are traded like oil futures.  People make money from them just by letting them pass through their hands...or rather their accounts.  They don't even handle anything in the physical sense, so like most everything else that Wall Street institutionalizes, this trade perverts the principles of economics, which are primarily directed at creation of new wealth and best use of old wealth.  You cannot create something--in this case new artificial wealth--out of nothing.  It has to come from somewhere, and in this case, it's the rest of us who are not trading in ethanol credits.

Despite my indignation over this particular scheme, there are many other phony wealth production techniques that our financial system not only indulges in but encourages.  If you listen to brokers and bankers, they think everyone should be involved in these endeavors so as to create what they need in the way of future wealth in order to retire and provide for themselves and their families.  But the fact is that if everyone did it, the net result would be a zero sum, and that is the last thing that Wall Street wants.  That is why we cannot get involved in such market manipulations.  They are controlled from the very top of our financial system, and small investors can only get burned by trying to cash in with the big boys, all of which begs the question of what to do about it, and the answer is very anti-Republican.  This particular abuse of the free market is a function of the failure of our federal government to act, not of too much government.  And such is the case with oil futures, agricultural products (you may remember the supposed coffee and sugar "shortages" of a few decades ago) and even electricity (I'm sure you remember Enron).  Market manipulation through speculation is at the heart of all of it, and it is what brought our economy to the brink of disaster, but government does nothing about it because no one makes them.  I've said this before, and I'll say it again.  What we need in this country is a viable third party, because the choices we have at the polls never include anyone who actually wants to do something about all this.

Your friend,

Mike