(Ryan again, marking time while Ed takes some pre-convention deep breaths.)

A theory about how galloping inequality causes recessions and panics goes like this. Back during the great postwar boom, productivity gains accrued to workers, and everyone including the poorest experienced rising wages. That is no longer the case. Productivity gains now fall through to the top, and the middle class has seen stagnant or falling wages for 30 years. People have blamed this on the decline of unions, the rise of financial chicanery, or declining innovation, but the fact of wide and accelerating income and wealth inequality is undeniable.

Wealthy people tend to save a lot more, which they want to invest someplace. But because the masses have less to spend, it’s harder to find profitable real investments with much return on them. (Even if you’ve got a good idea, it’s harder to make a profit selling it if people have less money to buy it.) Thus before the last crisis the creditor class lent that money out to the middle class in the form of cheap mortgages, which fueled an enormous housing bubble. Before that they were bidding up an enormous stock bubble in tech companies.

In this view, the reason we seem to have had weak growth, and one bubble after the next in the last 20-30 years (and the reason conventional monetary policy lost traction during the 2000s, with rates staying low for years and years with little effect) is that with flat wages among the masses and enormous hoards at the top, there is too much money chasing too few places to put it.

The latest evidence of this comes from Fredrick Kaufman in Foreign Policy, telling how Wall Street is dumping money into food futures, causing the price to skyrocket:

The money tells the story. Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities — including food — seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash. “You had people who had no clue what commodities were all about suddenly buying commodities,” an analyst from the United States Department of Agriculture told me. In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets. Food inflation has remained steady since.

The money flowed, and the bankers were ready with a sparkling new casino of food derivatives. Spearheaded by oil and gas prices (the dominant commodities of the index funds) the new investment products ignited the markets of all the other indexed commodities, which led to a problem familiar to those versed in the history of tulips, dot-coms, and cheap real estate: a food bubble. Hard red spring wheat, which usually trades in the $4 to $6 dollar range per 60-pound bushel, broke all previous records as the futures contract climbed into the teens and kept on going until it topped $25. And so, from 2005 to 2008, the worldwide price of food rose 80 percent — and has kept rising. “It’s unprecedented how much investment capital we’ve seen in commodity markets,” Kendell Keith, president of the National Grain and Feed Association, told me. “There’s no question there’s been speculation.” In a recently published briefing note, Olivier De Schutter, the U.N. Special Rapporteur on the Right to Food, concluded that in 2008 “a significant portion of the price spike was due to the emergence of a speculative bubble.”

The really horrible part of this is that it hurts poor people in developing countries the worst, as they spend far more of their income on food that Americans.

But the underlying story looks about the same. Sparked by gigantic hoards without productive destinations, Wall Street cranks up the derivative machine and manufactures a bunch of investment vehicles loosely tied to some underlying thing, causing its price to rise and rise.

The only question this time is how many people will starve before the bubble pops.

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