What economists and researchers think about the effects of speculation

[Cutten]

WARNING - this links contains facts and evidence. Political posturing, hot air, and ignorant soundbites will not be found therein. Open-minded and rational individuals may actually have their economic and political views changed by this read. Click to read this link at your own peril:

http://www.energypulse.net/centers/article/article_display.cfm?a_id=894fin

Summary of the effects of speculation:

1) Quick, cheap, effective risk transfer (a "free lunch" net gain to both parties in the transaction)

2) Increased liquidity (reducing transactions costs and improving hedging ability for producers and consumers)

3) Superior price discovery, leading to more efficient incorporation of information into prices (this results in more accurate pricing for producers and consumers to make their investment, production, consumption and hedging decisions with - another free lunch that benefits both producers and consumers)

4) Reduced market volatility (benefits everyone except speculators)

In other words, speculation has 4 beneficial effects to all end-users of a market. The only people harmed by speculation are speculators (competition reduces volatility and improves market efficiency and thus makes it harder to turn a profit). Read the link for the evidence.

If anyone disagrees, I welcome fact-based rebuttals on this thread. Please provide evidence, either from research or logic, as to the harmful effects of speculation.

 

[clacy]

Quote from Cutten:

WARNING - this links contains facts and evidence. Political posturing, hot air, and ignorant soundbites will not be found therein. Open-minded and rational individuals may actually have their economic and political views changed by this read. Click to read this link at your own peril:

http://www.energypulse.net/centers/article/article_display.cfm?a_id=894fin

Summary of the effects of speculation:

1) Quick, cheap, effective risk transfer (a "free lunch" net gain to both parties in the transaction)

2) Increased liquidity (reducing transactions costs and improving hedging ability for producers and consumers)

3) Superior price discovery, leading to more efficient incorporation of information into prices (this results in more accurate pricing for producers and consumers to make their investment, production, consumption and hedging decisions with - another free lunch that benefits both producers and consumers)

4) Reduced market volatility (benefits everyone except speculators)

In other words, speculation has 4 beneficial effects to all end-users of a market. The only people harmed by speculation are speculators (competition reduces volatility and improves market efficiency and thus makes it harder to turn a profit). Read the link for the evidence.

I didn't read the link, but I completely agree with those points. It seems like common sense that greater liquidity would make a market more efficient.

 

[Cutten]

Quote from clacy:

I didn't read the link, but I completely agree with those points. It seems like common sense that greater liquidity would make a market more efficient.

It depends on the people providing it. Bad speculators buy high and sell low, thus exaggerating volatility and making prices less efficient by buying & selling on false premises (e.g. "housing can only go up" or "Pets.com really is worth $10 billion"). Luckily, through the magic of capitalism, bad speculators go broke fairly quickly. The only sustainable speculators are the profitable ones, and to be profitable they normally have to have information - or the ability to interpret information - superior to the market as a whole.

It is this information advantage that provides the greatest efficiency benefit. The speculators who were loading up on oil at $30, 40, 50 a couple of years ago did everyone a favour, because they helped prices rise faster and thus sent the signal to producers, consumers, and governments that the supply of oil was grossly insufficient to meet the demand. Without those speculators, oil would have remained lower for longer and so we would have had *even less* investment and exploration in the last 2 years than we have had. Oil would almost certainly go far higher eventually in that scenario, as it would take an extra 1-2 years to get the same level of investment and exploration and thus supply. The faster the price gets high, the quicker supply can respond. Speculators help speed up that process and get the price to a more efficient level much quicker. Then, once the price gets *too* high, they will be pretty much the only people selling short and putting a cap on the potential bubble.

 

[Xuanxue]

Quote from Cutten:

WARNING - this links contains facts and evidence. Political posturing, hot air, and ignorant soundbites will not be found therein. Open-minded and rational individuals may actually have their economic and political views changed by this read. Click to read this link at your own peril:

http://www.energypulse.net/centers/article/article_display.cfm?a_id=894fin

Summary of the effects of speculation:

1) Quick, cheap, effective risk transfer (a "free lunch" net gain to both parties in the transaction)

2) Increased liquidity (reducing transactions costs and improving hedging ability for producers and consumers)

3) Superior price discovery, leading to more efficient incorporation of information into prices (this results in more accurate pricing for producers and consumers to make their investment, production, consumption and hedging decisions with - another free lunch that benefits both producers and consumers)

4) Reduced market volatility (benefits everyone except speculators)

In other words, speculation has 4 beneficial effects to all end-users of a market. The only people harmed by speculation are speculators (competition reduces volatility and improves market efficiency and thus makes it harder to turn a profit). Read the link for the evidence.

If anyone disagrees, I welcome fact-based rebuttals on this thread. Please provide evidence, either from research or logic, as to the harmful effects of speculation.

Without speculation you can neither call our economic foundation a free and fair enterprise system nor compare it with the tenet of Democracy.

Speculation prohibits overproduction, price gouging and monopolies, and encourages competitive capitalism and denounces oligopoly (monopoly) capitalism. It also unfortunately is the American citizen's only way to directly participate in voicing their vote, as it were, without the backing of lobbying firms, in economic policy changes.

Blaming speculators for these crises only plays into the hands of complacent, corrupt and incompetent politicans who haven't the inclination, or at this point, the creativity, to craft beneficial, pan-social-class legislation to levy against the problems in the first place.

It should be no surprise that proponents of banning speculating are the very same cadre of far-right, hawkish, financial elites attempting to dismantle the SEC in favor of more control by the FED.

The SEC implemented the ability to speculate. That other governmental agencies aren't quick to react to the populace, from pressure from finance moguls be it the FED or other private institutions really isn't our concern. The government will either act in good faith to restore economic stability by sound policy or we'll drive 'er into the ground until the next newly created political party by vote or force makes it right. And count on more short speculating if it isn't right.

 

[CollegeTrader33]

Quote from Cutten:


In other words, speculation has 4 beneficial effects to all end-users of a market. The only people harmed by speculation are speculators (competition reduces volatility and improves market efficiency and thus makes it harder to turn a profit)

Costs are adjusted so target profits can be made. Costs get passed to consumers.

Generally I am for speculation, just needs to be regulated a little more, especially in the "necessary" commodities markets.

 

[kdmundrick]

Quote from Xuanxue:

Without speculation you can neither call our economic foundation a free and fair enterprise system nor compare it with the tenet of Democracy.

Speculation prohibits overproduction, price gouging and monopolies, and encourages competitive capitalism and denounces oligopoly (monopoly) capitalism. It also unfortunately is the American citizen's only way to directly participate in voicing their vote, as it were, without the backing of lobbying firms, in economic policy changes.

Check and mate. A smart cookie you are.