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Profits = Stabilization
Oil market speculation is back in the news. I'm afraid I don't have much to contribute since Milton Friedman convinced me long ago that profitable speculation is stabilizing and destabilizing speculation is unprofitable. Speculation is profitable if the speculator buys lower than he sells; it's unprofitable if he sells lower than he buys. Even if they don't make a profit, they are trying.
4 Responses to “Speculation”
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July 8th, 2009 at 5:42 pm
Not a fan of the Soros reflexivity theory, then?
July 9th, 2009 at 9:33 am
Nemo
I’ll have to read up on it. Thanks for the link. I’m afraid my brief post was a confession that I haven’t given thought to the matter for decades.
July 14th, 2009 at 2:25 pm
Can’t we say the same thing about gambling? A profitable gambler guesses right more often than he guesses wrong. An unprofitable gambler guesses wrong more often than he guesses right. Even if they don’t make a profit they are trying. What this misses is hte fact that there are very real and very destructive social consequences to gambling. And there are very real and very destructive consequences to excessive speculation. Markets become distorted and, eventually, broken. Wild swings in the price of oil, from 15 to 150 then back to 30 and up again to 70 is not rational price discovery. It also makes the ability to lay off risk much harder as well.
July 17th, 2009 at 3:03 pm
I would argue that speculation, per se, isn’t what causes bubbles, and it’s certainly not blind gambling in the same way that the lottery is. Speculators provide a market for non-speculators, or hedgers, to lock in a price for their physical goods, thus allowing them to transfer the risk of a price drop which could occur before the hedger is able to sell that good in the spot market. In this respect, speculators provide an invaluable liquidity for the market in general.
Excessive run-ups in prices occur for a number of reasons. Much of it, at least in my opinion, has to do with the irrational actions inherent in frothy markets (i.e. the recent commodity/real estate bubble, internet bubble of the late 90’s). At some point a significant group of investors ignore logic and determine that a market in question only moves in one direction.
When we talk of some kind of intervention to stop such wild, and maybe unnecessary, swings in pricing, you have to wonder if the medicine is worse than the disease. If you’re talking about a large government footprint, I would have to guess that a multitude of negative side effects will arise without even looking at the proposal. Speculators have a purpose. Smoothing out so-called excessive speculation may in fact be a worthy endeavor. However, it’s not a problem that should be addressed without a ton of thought in regard to the unintended consequences rendered by the cure.