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Of Speculative Bubbles, the Crisis in Finance, Corn & Ethanol

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Alternative energy and clean technology businesses and investors are rightfully concerned that the credit crisis and the utter and complete failure of a growing number of the nation’s largest, most prominent banks and investment funds will severly restrict their access to private working and long-term capital. 

Some even expect that with oil prices falling to, even below, $50 a barrel, that the stage is set for a repeat of a pattern seen following the ending of the OPEC embargo of 1979-80 and disinflation that followed, namely interest in, and resources devoted to developing a more diversified, decentralized and cleaner energy system built around renewables fading into obscurity.

Moreover, recent events in the financial, commodities and biofuels markets have forcefully demonstrated the substantial, often well-hidden, risks associated with divining underlying, sustainable trends and determing the relative risk/reward ratios of young businesses in emerging industries subject to and dependent upon unproven technology. 

That’s been particularly true with regard to first generation biofuels, particularly ethanol produced from corn and the African date palm, which is now planted on plantations throughout the world, in
many cases by clearing and displacing indigenous forests and plant species.

And they all came tumbling down

It wasn’t long ago that recognized experts were blaming biofuels production– here in the US, corn ethanol in particular– for rapid, sustained rises in corn and other commodity food crop staples. More recently, corn prices have plunged along with those of just about every agricultural and industrial commodity. Yet more ethanol was produced in the past year than has ever been the case.

While I believe this disproves the oft-voiced claim that corn ethanol production was the main factor causing sharp price rises in agricultural commodity staples, it doesn’t address the substantial and increasingly alarmig issues of agro-industry’s substantial contributions to carbon dioxide and greenhouse gas emissions, water pollution, land and soil degradation, forest clearing, and displacement of staple food crops in poorer nations.

Put simply, unbridled monetary expansion, use of leverage, government guarantees on private sector debt, all of which led to the banking and credit crisis, has also led to the plunging price of corn and every other tradable asset and commodity. And the plunging price of corn is wreaking havoc among US farmers, particularly those involved in the ethanol market.

Having expanded and geared up to the point where it was the nation’s largest ethanol producer in less than seven short years VeraSun Energy in early November was forced to enter bankruptcy–thanks in large part to the Bush administration and Congress favoring corn ethanol subsidies over other alternatives.

Commodity prices have fallen sharply just as the foreign exchange value of the US dollar has appreciated. More to the point, the deflation of this latest, greatest asset bubble demonstrates how unbridled expansion of the money supply, along with government approved blessing to increase their leverage by several orders of magnitude–not to mention implicit guarantees of mortgages– gave banks, brokerages, hedge and private equity funds free license to drive up market prices of every tradable asset, be it real estate, stocks, gold or corn.

We’re now experiencing the painful process of all this coming to an end. It’s all come to pass in a relatively short time, although for financial market participants and investors it seems like the end cannot come fast enough. Unfortunately, the real problems caused by a decade of unbridled financial excess cannot be addressed, much less solved, in anything near the type of time frame market boffins and talking heads, as well as a public conditioned by electronic media to expect immediate results, can or should expect.

Looking at it from one perspective, all this should make developing second generation ethanol, biodiesel and biofuels that much more important and potentially beneficial.

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