Consequences 6.65 Speculation reigns

What is the impact of having a money system that constantly cycles between economic boom and bust? It unbalances the marketplace, making prices more volatile and speculation more prevalent. The privileged have the power and wealth to first rig, then own the marketplace. And when you own it, it works to your advantage to turn it from industry to a casino. You make more on the gambling in a rigged casino than on the sales at the lunch counter or the gift shop. Does this sound like our economy today?

Hedge fund managers who wheel and deal make some of the highest incomes ever. But, they contribute little of value. In 2016, the top two hedge fund managers each took home $1.5 billion – up from $1.1 billion and $1.2 billion in 2014.120 That’s a 50 percent increase in income in two years and it should tell you where we are on the exponential curve of money creation. Together the two of them could pay for the entire budget of San Jose, or San Diego, or Austin, or Dallas, or Detroit, or Boston or Charlotte.121

A value taken to extreme

Traders who are intermediaries between real sellers and real buyers provide a service. For example, a distributor who gathers eggs from many farmers and brings them to local grocery stores provides a service.

In contrast, speculators buy and sell only to make a profit; they do not take possession of a good or service and use it or add value. A few speculators who buy and sell just for the game of profit extraction, expand the number of buyers and sellers in a marketplace. This is a boon to sellers; more people competing to purchase their goods means they get a better price. However, it is a burden on genuine buyers, as they must pay more.

When speculators overwhelm a marketplace, they run the price of goods up as they extract profit buying and selling amongst themselves. The final buyers who actually take possession pay significantly more than they would have paid had they been competing with only other genuine buyers. For example, the gallon of gas you buy, has been bought and sold hundreds and thousands of times by speculators ratcheting up the price a micro-penny at a time as they take a profit. In the 1960s a stock was held for eight years on average.122 By 2014, the average length of time was in the seconds for at least 85 percent of the trades. Some trades hinged on microseconds between buy and sell.123 When a real buyer, who wants to take possession of some crude oil steps up to the plate, estimates say from 30–60 percent of the price they pay went to gamers in the financial sector.124

This is true for all the commodities that trade in a public marketplace where gamers are allowed and unfettered. Consequently, you pay more for everything you buy. This is a burden on the whole world. As recently as 1975 roughly 80 percent of foreign exchange transactions involved the real trading of a product or service. By 2011 the Global Policy Forum could only trace 0.6 percent to genuine international trade in goods and services. On world market exchanges - commodities, stocks, currencies – well over 90 percent of the trades are now made by speculators.125

On our stock markets, at least 85 percent of the trades are made by high-speed speculators who hold the stocks for micro seconds, leveraging their high data transmission speed so they see who is intending to buy, beat them to the purchase, add a sliver of profit and sell immediately. It’s difficult to know, but some estimate there is a high-speed trader on at least one side of every single trade in our markets. By making millions of these trades, adept traders take home billion dollar incomes. Their incomes come out of the nation’s pocket, as they raise the price of everything. This raises the prices of stocks, too, which is a boon to investors, including the retirement accounts of many. But, the increase is unrelated to an actual increase in the value of a company, and it is vulnerable to the next bust.

Michael Lewis’s book, Flash Boys (2014), offers a jaw-dropping glimpse into this world. These traders are skimming cream off the top of the entire economy, making everything we buy cost more.126

Our current financial system allows the wealthiest people in the financial sector to buy and sell without putting up much money of their own and without taking possession of the goods. There are some limitations on the leverage players can exercise, which are most stringent on smaller players. The closer you are to the center of action and the bigger the player, limitations on leverage dwindle to practically nothing.

When you don’t have much skin in the game, speculation becomes the rule, rather than the exception. And, this is how our marketplace operates today.

A culture of gambling

When there is more money to be made playing the game rather than making a real contribution to society, the culture changes. A culture of speculation has eaten away at our responsibility to the common wealth and to our own futures. We once believed gambling was either a sin or an acceptable entertainment in moderation. Lotteries were common in the 18–19th centuries in the US and often used in lieu of taxes for public works. But, seldom regulated, corruption was common, and by 1900 lotteries were mostly banned.

In the 1960s – the beginning of the steeper slope of our exponential curve of money creation – state government debt increases meant more tax revenues were going toward interest payments and less was available for services. State governments sought other funding sources, and lotteries seemed an easy, no-additional-taxes choice. Now we accept lotteries are necessary to adequately fund our schools and other basic services. In 2016, 44 states and territories offered government operated lotteries.127

In 2017, Americans spent $74 billion on lottery tickets. This is more than the total spending on music, books, sports teams, movies and video games combined, according to CNN Money.128 That’s a lot of money not being saved for retirement or used to pay off credit card debt or used to buy better food, safer housing or education.

According to Reuters, “the 44 states with lotteries (plus the District of Columbia and Puerto Rico) get 44 cents from this form of gambling for each dollar of state corporate income tax.” At last count, there were 11 states in which lottery revenues exceeded revenues from corporate taxes. And most lottery gamblers are poor. My home state of Oregon is one of three states that draws more than 5 percent of its revenue from gambling. Collecting revenue for commonwealth services by suckering mostly the poor into gambling is deeply troubling.129

We can do better.