The Financial Times have an opinion piece that is worth reading.  Speculators are doing God’s Work.  The God’s work is from the boss of Goldman Sachs, Lloyd Blankfein, who made a throwaway question to a journalist about the work of the bank, a quote that hit the front page and that he has regretted ever since.

Speculators are getting a bad press at the moment.  How can people make more money by guessing future prices than by making useful things?

Some people would answer, does it matter?  Money is, after all, being made.  So I might as well make it.  But other people are a bit more reflective and will wonder whether what they are doing actually has any social value.  Even if they do make money they will feel guilty about it.

Well speculation fulfils a very basic need.  There are people who either hold assets or will need assets in the future who put the wrong value on this asset.  Perhaps they are a miner who’s making enough of a profit by selling coal (let’s be old fashioned) at the current market price.  A speculator thinks that the price will rise and therefore offers to buy the good at a higher price.  The miner therefore gets a higher price.  On the other side a manufacturer may have underestimated future demand for their product and so totally underestimated the amount of coal they need.  When they come to buy it everyone else is doing the same.  In comes the speculator with their coal, which they will sell at a slightly lower price compared to the market.

As well as keeping a market fluid, speculators also allow for a more predictable economic future.  The same miner can sell his future production to these speculators and therefore have a good idea of his future income, in the same way the factory owner can buy – often from the speculator – their future coal requirements.  Hedging is made possible by the speculators, including those on the spread betting and contracts for difference markets.

There is no need to feel guilty about winning; speculation is doing the economy an almighty favour.

Last Updated: March 23rd, 2010