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.