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It's All The Fault Of The Speculators

Jeremy Hetherington-Gore Unleashed
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).


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Jeremy Hetherington-Gore Unleashed

Jeremy tackles the difficult issues head on!

 

 

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