Why They Won’t Do Away with Speculation
By Andrew Kliman.
Don’t be fooled by all of the hand-wringing and crocodile tears being shed over the role of financial speculation in bringing about the current economic crisis. Policymakers aren’t going to do away with speculation.
And the reason isn’t that there’s a conspiracy between them and the speculators.
Paul Krugman gives away the fundamental reason is his latest (July 21, 2009) New York Times post:”Any time you have a market, there’s some opportunity for speculation.”
They’re not about to do away with markets. So they’re not about to do away with speculation.
Krugman explains the unavoidable link between markets and speculation as follows:
Any time you have a market, there’s some opportunity for speculation. Even if the good being traded isn’t storable, there may be a futures market, so you can bet on the future price. If the good is storable, the spot price may be moved by the futures market, since high futures prices may provide an incentive for stockpiling.
For example, the fact that wheat is traded means that there’s also a wheat futures market; and because wheat can be stored, futures prices affect spot prices.
So, should fear of speculation lead us to ban trading in wheat? Nobody would say that. [my emphasis; full post here]
Nobody? What am I, chopped liver?
Do you want to keep having speculative crises and the unemployment and impoverishment that accompanies them, Paul “Conscience of a Liberal” Krugman?
While I’m on that theme, here’s what Conscience of a Liberal recommended that Japan do to get out of its last economic slump:
the country should save heavily to make provision for the future-and lacking the kind of pay-as-you-go Social Security system that allows Americans to ignore such realities, it does. …
What Japan needs to do is promise borrowers that there will be inflation in the future! If it can do that, then the effective “real” interest rate on borrowing will be negative: Borrowers will expect to repay less in real terms than the amount they borrow. As a result they will be willing to spend more, which is what Japan needs. In short, this explanation suggests that inflation-or more precisely the promise of future inflation-is the medicine that will cure Japan’s ills. [emphasis in original; Slate, June 12, 1998; full post here]
Just to make sure everyone understands this: Conscience of a Liberal recommended that the Bank of Japan create inflation in order to wipe out Japanese workers’ retirement savings-and this in a country without a Social Security system. If inflation keeps eating away at their retirement money when it sits in an account, it’s better for them to spend the money instead. And so that’s what they’ll do! End of slump. “Japan’s ill’s” are cured … even though Japan’s workers’ ills become greater.
Now we know why liberals have a guilty conscience. They’re guilty.
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A final note: Krugman’s point that markets are inherently speculative ties in nicely with Michael Egoavil’s piece on our website that finance is inherently speculative-both private, free-market finance and state-owned and/or -controlled finance.