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The Progressive Economics Forum

Speculation vs investment

Financial market speculation masquerading as investment is driving me crazy. The business press fails to understand the distinction between buying an asset the delivers a stream of income in the future (a dividend) and buying an asset because of anticipated higher resale price in the future (a capital gain). It is a fundamental difference, and while I have little objection to real (and incremental) investment, I think capital gains should be fully taxed, and short-term capital gains taxed completely away.

A few weeks back I was on Saltspring Island and met a former Buddhist monk, who had inherited some money and was now day-trading the NASDAQ. She was a super-nice person, but knew very little about economics or even technology companies. Each day she would dive in, usually betting on the movements of stocks when a quarterly report was being released, holding the stock for no more than a few hours, and never overnight. In truth, I don’t think she was making much money doing this. But how can this be justified as a productive activity in terms of her own labour effort and in terms of the externalities of day trading in general?

With the recent run-up in food prices, the larger consequences of speculation are becoming more apparent. It is not just some zero-sum game in the stock market where one sucker loses while another gains. It is profoundly affecting the livelihoods of some of the poorest people in the world. Speculation is not the only cause of the recent run-up in commodity prices (droughts have raised food security amid climate change as a major issue), but it is not helping. Here’s a quote from a recent Globe story:

Many farmers blame the growing influence of investment funds for distorting commodity prices. According to figures compiled by Gresham Investment Management, a commodities brokerage in New York, the amount of speculative money in commodities futures – that is, investors such as big funds that don’t buy or sell the physical commodity but merely bet on price movements – was less than $5-billion (U.S.) in 2000. Last year, it ballooned to roughly $175-billion.

By some estimates, investment funds control 50 per cent of the wheat traded on the Chicago Board of Trade and Chicago Mercantile Exchange, the world’s biggest commodity markets.

“Even the most plain-Jane investors are being told they have to be in commodities,” said Michael Swanson, an agricultural economist with Wells Fargo in Minneapolis. Regulators and fund managers say the funds provide valuable liquidity to the markets. They also point out that the average fund investor is a middle-class worker saving for retirement.

There is something deeply problematic if a whole generation’s retirement prospects are predicated on a continued rise in asset prices (as opposed to the income generated from those assets). We have seen this lead to bubbles in stocks, then real estate, and now the money is moving into commodities like gold, oil and foodstocks. There may be some smidgen of “fundamentals” driving these shifts in sentiment and trading, but the bulk of the action would appear to be fuelled by greed.

And there is of course, Keynes, who himself made a fortune in stocks, but who famously stated in the General Theory:

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.

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Comment from Paul T.
Time: April 25, 2008, 10:36 am

a favourite Polanyi quote of mine, for some reason that book is never far from me. Its getting pretty beat up of late. And to think in grad school I traded a Berman, “All that is Solid Melts into Air” for a Polanyi “The Great Transformation” Book. James M or should I say Jim. my old friend your got rooked in that deal. (I have apologized many times)

Karl Polanyi a shorter version of what I usually quote,

“Finally, the market administration of purchasing power would liquidate business enterprise for shortages and surfeits of money would prove as disastrous to business as floods and droughts in primitive society. Undoubtedly, labor, land and money markets are essential to a market economy. But no society could stand the effects of such a system of crude fictions even for the shortest stretch of time unless its human and natural substance as well as its business organization was protected against the ravages of this satanic mill.”

This on the fictions of the commodification process and its ideology as espoused by the neo-liberals or neo cons over here.

With the communication revolution, this process is brought to a new level of destructive power, and as you denote it is performed 24/7 around the globe. It is a huge societal bulldozer that needs regulation. The voices need to move such levers of change will always be on the outside of the wealth as they do not participate in such activities, and as much as we think that banners and such can move these levers, nothing is more efficient than the cold hard organizing power of cash.

I hate to be pessimistic, but even now most of the voices finally being heard for regulation are those within the herd that actually make it to the watering hole. Some are making some quite loud noises as their holes have dried up.

Also I am not sure that it is as much of a casino as we tend to make it out to be. The more money you have involved in the process the better the odds of winning are. So I do not like the personification or benchmarking to a casino. Maybe for the smaller investor, but the bigger they are the higher the odds of walking away.

Quite sad really as the amount of capital and the small profits associated with the coming Transformation towards the green economy, will hardly muscle up against the profits now being generated within the speculative circles.

So if policy makers ever want the green transformation to get develop the push it needs, they would best be served bu shutting down these watering holes. We need innovation to levels that will be quite costly and capital outlays will be huge and we will need regulations and change to make it happen.

Yes there are many low cost alternatives to incite change but these are minor compared to the sustainable changes.

(bigger rant for the day)

Comment from Stuart Murray
Time: April 25, 2008, 12:15 pm

Well, isn’t all future-looking activity effectively speculative? You have to make some kind of bet about what future markets are going to be when you make a real investment. Also, bubbles tend to leave behind a whole bunch of infrastructure in their wake, as that kind of real investment will have often been created to rationalize the price inflation. Hence the massive buildup of internet sites and real estate improvements immediately preceding the respective crashes. Real investment and pure speculation are hard to disentangle. Of course, there are plenty of real investments (both public and private) that don’t yield anything at all, so those would be regarded more harshly as “bad” investments than anyone flipping real estate. And sometimes the hot air causes real economic activity. When I worked at a consulting firm, we would get clients who were obviously looking to put predictable recommendations on a prestigious letterhead. So the higher prestige associated with the letterhead warranted higher fees, which paid for a fancy office and job applicants with a good education, stimulating a flurry of posture-based activity that could easily be dismissed as wasteful. Then ten seconds later the consultants would work on a bricks-and-mortar project and have their recommendations simply ignored. I wouldn’t want to tax away all short-term gains, because I think scalpers provide a useful service and I think they deserve to keep what they earn. The gap in prices is what attracts the economic activity, be it silly or concrete, and that activity is what closes the gaps and moves things forward. We can’t all work in a fixed-location manufacturing plant producing physical objects for the domestic market; that work is for a smaller portion of the workforce who think secretaries don’t do anything.

Comment from zenith
Time: April 26, 2008, 10:53 am

CIBC is loser in both investment and speculation.
Now they transfer their lose to consumer.They are
mother of all sucker behind scene pumpig oil and food
price.All banks include u.s.banks try to suck out
people money to feed their losing.This become openly
money robbing day light. Lier big and small repeatly
show up on tv and radio try to rationaliztion this.

Comment from Michael Barkusky
Time: April 26, 2008, 2:59 pm

And liquidation of irreplaceable natural capital (trophy hunting of polar bears is an egregious example, but there are many other less obvious ones) masquerading as “economic activity” of any kind, drives me nuts too !

Here is a simple tax reform to discourage speculation – deny deduction (or offset) of capital losses on assets held for less than, say (somewhat abitrarily) 6 months or 1 year, against capital gains of the same, prior or future years, while raising the inclusion rate on equivalent short-term gains to 100%. This isn’t as severe as taxing away short-term capital gains entirely, but it would certainly discourage day-trading.

Now if I could only think of an equally simple (and politically appealing) tax reform to discourage liquidation of natural capital !

Comment from travis fast
Time: April 28, 2008, 10:24 am


That was not Berman it was Marx!

The bourgeoisie cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and with them the whole relations of society. Conservation of the old modes of production in unaltered form, was, on the contrary, the first condition of existence for all earlier industrial classes. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind.

Comment from travis fast
Time: April 28, 2008, 10:25 am

In the Communist Manifesto to be exact.

Comment from Stuart Murray
Time: April 28, 2008, 1:48 pm

That sounded more like Camus.

Comment from travis fast
Time: April 28, 2008, 3:06 pm

Funny hey how things get appropriated without citation. It is three pages into the CM. Poor Engles he never gets any credit.

Comment from Paul T.
Time: April 28, 2008, 8:27 pm

that was the title of a book that Berman wrote, which as you point out is an oft quoted statement from the Manifesto. In this book Berman outlines the condition of modernity amidst the attacks of the post modernists.

Camus had many interesting things to say, but not that line.

In fact it is people like Camus that make it all quite an interesting planet to live on. He will stretch one’s 2 inches of cortex to some new space for sure. Amidst all the turmoil and confusion of the now and that which was before, within our culture are some shining tidbits of knowledge that actually make it seemingly more reassuring to put ones foot down on defining us. Camus in his book the Stranger, was helpful in that regard, at least for a short while in ones journey.

The Manifesto is another, unfortunately it is never safe to stay in one place too long. Change is one of the rare known artifacts of our being. Excuse the philosophy but I am taking a course in the research of the philosophy of science, and even the scientists admit, that change is one of the few constructs that we know for sure exists and is eternal. As just about everything else melts into “air”. lol

Comment from Todd Archer
Time: April 29, 2008, 8:47 am

“I think scalpers provide a useful service and I think they deserve to keep what they earn”

“Every service is productive for its seller. To swear false oaths is productive for the person who does it for cash. Forging documents is productive for anyone paid to do it. A murder is productive for a man who gets paid for doing it. The trade of sycophant, informer, toady, parasite, lickspittle, is productive for people who do not perform these ‘services’ gratis. Hence they are ‘productive labourers’, producers not only of wealth but of capital. The thief, too, who pays himself—just as the law-courts and the State do —’employs his energy, uses it in a particular way, produces a result which satisfies a human need’, i.e., the need of the thief and perhaps also that of his wife and children. Consequently [he is a] productive labourer if it is merely a question of producing a ‘result’ which satisfies a ‘need’, or as in the cases mentioned above, if selling his ‘services’ is enough to make them productive’.”

(I wuv Marx.)

Comment from Stuart Murray
Time: April 30, 2008, 12:12 pm

I think that’s more in the realm of broken-window economics, as opposed to trying to disentangle whether flipping real estate with a new coat of paint is legitimately productive.

Also missing from this debate is the massive value of volunteerism, which can be highly productive yet is not technically a part of GNP. Except for volunteerim for a church, which IMO falls squarerly under the “sycophant, informer, toady, parasite, lickspittle” category above. Talk about speculative activity, let’s put a theologian at the front of a near-empty room and talk about the will of god. Then give them a tax break. I’d rather spend the money on a venti caramel macchiado.

If only the folk fest would buy back my extra tickets at purchase value we wouldn’t need scalpers anyway.

Comment from Todd Archer
Time: April 30, 2008, 7:02 pm

“Also missing from this debate is the massive value of volunteerism, which can be highly productive yet is not technically a part of GNP.”


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