Posted on 05/31/2008 9:58:47 AM PDT by newbie2008
. People who argue that speculation is destabilizing seldom realize that this is largely equivalent to saying that speculators lose money, since speculation can be destabilizing in general only if speculators on the average sell when the currency (commodity) is low in price and buy when it is high.
~Milton Friedman, Essays in Positive Economics (p. 175)
In other words, specualtors who contintually lose money by buying high and selling low (which would increase volatility and be destabilizing) will be forced to leave the market eventually, and only rational speculators – those who will actually help to stabilize prices – will survive.
2. Speculators anticipate shortages and buy up commodities early, thereby removing them from the market. This alerts consumers to the oncoming shortage, fulfilling the important financial market role of providing information and allowing them to reduce consumption as prices rise. Later, the speculator sells, ameliorating the shortage while making a profit.
Speculators anticipate and warn others about shortages—they do not cause shortages. As a result of their trades, price swings are less severe than they otherwise would have been. We do not blame doctors, police, or firemen for profiting from the misfortune of others because it is understood that they help a bad situation. Speculators deserve the same consideration.
Farmers buy and sell futures to reduce risk,,,,and airlines that can afford them (like Southwest), buy huge amounts oil futures to REDUCE RISK.
Those are smart, conservative business strategies (hedging to reduce risk due to unforeseen events like weather, political events, etc) that SOME would call speculation.
Do we want the government to get even more intrusive and more controlling to stop companies from reducing their risk due to unforeseen events? Not me.
>>>What some would call ‘specuation’ ... is a common sense strategy to REDUCE RISK due to price fluctuations.
I’ve been posting this for weeks now.
Speculators “buy” large amounts of market risk at the high-end and low-end of equities in order to (hopefully) profit from pricing errors at the extremes.
As a byproduct of that, speculators create more-or-less stable trading ranges with lower risk levels.
Culturally it’s easy to blame “speculators” for whatever, since our culture doesn’t necessarily want to reward those who traffic in inordinately high levels of risk (e.g. speculators, mercenaries, gamblers, and others on “the dark side”).
As a byproduct of that, speculators create more-or-less stable trading ranges with lower risk levels.
So a 40% rise in prices at the pump in several months' time constitutes a stable trading range.
Remind me to forget I read that.
Cheers!
Remove the speculators and reduce liquidity and then tell me how you like the markets.
Remind me to forget I read that.
Economics is hard.
Cheers!
Of course Toddster, you recognize that long only index speculation, with no position limits, is a bit different that good old fashioned speculation in the pits, which is why their is an almost universal outcry to end this particular form of speculation.
To be sure, there are some speculators who buy high and sell low. Such speculators can indeed contribute to market instability. On the other hand, such speculators can't generally do much damage before losing all their money.
As AndyJackson, among others, has pointed out very clearly, the long-side only speculation by (principally) pension funds differs radically from traditional speculation, in that the LOSO specs never sell. By insisting on staying long all the time, and adding more capital over time, their net effect is the removal of both liquidity and stability.
Whereas the ordinary spec, big or small, adds liquidity to mkts, greasing the wheels so to speak, the LOSO fund specs are engaging, willy-nilly, in throwing liquid cement into the gears of the mktplace, and grotesquely manipulating prices into the bargain.
And Todd, the converse of "the abuse does not abolish the use" is "the legitimate use does not justify the abuse".
Cheers!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.