| 03 August 2008
There's a popular game that politicians play, especially before elections,
called 'Blame The Speculators', which relies on the economic ignorance of the
population. No sensible politician, if that's not a contradiction in terms,
really believes that speculators drive markets, but politicians like to pretend
that they are in charge of things, so when a price bubble comes along, rather
than admitting they are powerless they 'blame the speculators'.
From the Gnomes of Zurich, favourite target of Harold Wilson in the 1960s when
his disastrous economic policies wrecked sterling, to Dr Mahathir, who closed
Malaysia's markets to the world in the 1990s to keep George Soros and other
'foreign speculators' away from the ringgit, speculation has had a bad rap.
Last week saw the US Senate launch an attempt to stop speculation in the price
of oil. There are two unusual things about it, one being that it's bi-partisan,
which doesn't make it sound like an election gimmick, and the other is that
rather than punishing speculation, the Bill calls for all futures trades in
oil to be treated equally - currently 'legitimate' trades in oil are taxed more
harshly than 'speculative' ones, which attract capital gains tax rather than
profits tax.
But the honorable gentlemen have got the cart before the horse. Speculators
have a useful role to play in markets: far from accentuating price movements,
speculation normally works to limit them - for every trader who bets on a continued
rise in price there are two more who bet against it, and it duly falls, as indeed
happened in the oil market last week. What causes price spikes and asset bubbles
is human nature, not speculators. Politicians often worsen the situation by
attempting to control it, of course.
Almost all countries allow tax exemptions or reductions for traders, which
inevitably encompasses 'speculators'. All trading is speculation, from one perspective.
The Senate can do one of two things to change the current balance, both equally
disastrous: it can put oil traders on the same basis as oil companies by taking
away their exemptions (result - the US oil futures market will move to London
in the space of a few minutes); or it can give oil companies the same treatment
as traders (result - the oil companies' already enormous profits will double
or treble).
You have been reading an entry on the following blog:
Jeremy Hetherington-Gore Unleashed
Jeremy tackles the difficult issues head on!
Contact: jeremy@lowtax.net
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