this is my first post at the Mises community - I’m so happy to have joined!
I’ve tried googling this question and found lots of interesting arguments. However, I could not find an answer to this specific question:
In another forum I’ve been discussing the Tobin Tax, and I’ve claimed that speculants help the price of an asset reach its ‘optimum’ price faster which decreases the risk for Average Joe when he subsequently does his trading. Now I’ve been faced with this claim:
Speculants do NOT trade due to an estimation that the asset price is over/under-valued.
Speculants act because they expect the trend of a current upward- or downward-sloping price to continue.
Thereby speculants act to exaggerate the fluctuations of the market.
Your reasoning on the Tobin tax is right, Rasmus Hochreuter.
In a letter to the New York Times, economist Donald J. Boudreaux said:
Paul Krugman supports a “Tobin tax” as a means of reducing speculation (“Taxing the Speculators,” Nov. 27).
Bad idea. Speculators buy assets only when they predict that these assets’ prices will rise; speculators sell assets only when they predict that these assets’ prices will fall. And speculators profit only when they predict correctly. So speculators who predict correctly help move asset prices more quickly to these assets’ ‘true’ values.
For example, a speculator who buys 10,000 shares of Microsoft believes that Microsoft’s stock is currently undervalued; the speculator’s purchase of this stock raises its price closer to what the speculator believes to be its ‘true’ value. If the speculator is correct, his speculation raises that asset’s price closer to where it should be. This ‘truer’ price – by more accurately reflecting market fundamentals – makes investment less risky for others and makes the allocation of capital more efficient.
But if the speculator is incorrect, he loses. That is, the market already ‘taxes’ harmful speculative moves while it rewards beneficial ones.
Yeah, it’s pretty much all crap. First of all, the optimum price of the market is the market price. There is no counterfactual, normative price against which the actual price can be compared. It’s like throwing a baseball and saying “well, it should have gone much faster” - it went as fast as it was thrown because that’s how cause-and-effect work. There is no should, there is only is.
Second, I would love to own the crystal ball that these people have that is telling them what speculators do and do not trade on. And if it is the case that speculators are not so “naive” as to simply trade on spot prices, trading on trends instead, why should we believe they are such simpletons as to trade on simply up and down trends, rather than on the trends of trends (increasingly upward versus decreasingly upward, or increasingly downward versus decreasingly downward)? Ad nauseum.
Now, this is not to say there are not such things as manias. Manias are real and they do occur and they are rooted in social dynamics… “Hey, Bobby says VXR is a buy buy buy!” But to attribute this to an automaton-like tendency of traders to buy into rising prices and sell into falling prices is just silly.
There is no ‘optimum’ price for anything. Whoever claims to know it, is merely speculating. Why should two parties (either or neither being speculators, regardless) care whether their voluntary transaction increases or decreases risk for Avg Joe? Why is decreasing risk for Avg Joe valued, and by whom? Is Avg Joe speculating? Are you not speculating when you leave job A for job B? How is acting itself not speculating?
Traders trade for all sorts of reasons. The more everyone trades for the same reason and with the same rules, the more those reasons/rules stop being profitable, forcing everyone to seek new ones.
Taxing X inevitably leads to less X. Voluntary transactions are the fundamental atoms of the body called Market. You can’t make a body stronger by destroying the atoms that comprise it. Tax on voluntary transactions is a direct assault on markets and freedom.
The main cuplrits for price volatility are the booms/busts caused by central banking. Through centuries, central bankers have always blamed speculators for the inevitable effects of their manipulative (mostly inflationary) policies. Today, the situation is no different. Expect more cries for “reining in the greedy speculators” as the real currency manipulators (printers) destroy whatever semblance is left of the free market.
if a person is trading based on an estimation that the asset price is over/under valued they are still speculating. the line between investment and speculation is very gray. even the masters of investment graham and dodd had a difficult time delineating the two activities. determining the “intrinsic value” is nothing but speculation. it may be an educated guess based on some sort of “scientific method,” but it is still speculation.
yes, watching charts and applying technical analysis is ONE way speculators make decisions. more importantly, the particular reason why an individual chose to act does not matter in the analysis of the consequences of their having acted. speculators provide a valuable service to producers and consumers. for the former they provide a form of insurance, the latter actually gain in price stability and resources are allocated to the consumers most desired ends.
Rasmus, FYI, you don’t need to verify all answers to a question. One or two – the ones you think bests answer it – is sufficient. Or none. All verified answers get reposted right under the original post so it makes reading the thread more cumbersone.
