How the Robinhood Tax campaign is gathering steam


1:53 pm - June 20th 2011

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contribution by Owen Tudor

Some people have very short attention spans. The resurgence of the global left after the Great Depression took a decade and a half (and a world war). The campaign for a UK national minimum wage took at least a dozen years.

The Robin Hood Tax campaign has been running for just over a year, it is on its way to victory. It has been staggeringly successful in several respects.

When the idea began to surface in 2009 – Adair Turner’s speech in the summer, Gordon Brown’s intervention at the G20 Finance Ministerial in the autumn – it was obviously an old one in some ways: John Maynard Keynes first proposed a transactions tax in 1936 and James Tobin had suggested a currency transactions tax in 1973.

As the IMF have reported, at least 16 of the G20 economies have had some form of a Financial Transactions Tax in place over the last decade or two.

The call for a full-blooded FTT – shares, derivatives, currency – was slammed by the IMF, the Financial Times (mostly by omission), and many commentators.

Launching our UK campaign in February 2010 with a Richard Curtis/Bill Nighy video undoubtedly gave us hundreds of column inches and massive popular appeal, but it did, admittedly, allow people to accuse us of putting form before substance.

But that massive popular appeal (250,000 supporters on Facebook, and majority support in polls across western Europe) was what got us through the front door of the media, governments and international institutions.

That, and the support of a growing number of civil society organisations and economists (350 holders of a PhD in economics signed a letter in support a year ago: the latest attracted over 1,000).

But keep this in mind:
» Even some banks now support the idea.

» Two major multilateral institutions, the IMF and the European Commission, have been converted from slamming the idea as unrealistic to admitting that it is feasible and progressive.

» The European Parliament, the French, German and Spanish Parliaments have all recently carried resolutions supporting an FTT. So has Brazil’s and Francophone African Finance Ministers.

» The Governments of Austria, Belgium, Bolivia, Greece, Luxemburg, Slovakia and South Africa are in favour.

We still have to convince some people that financial institutions won’t shop around if some countries adopt FTTs unilaterally;
1. that the costs will mostly not be passed on to ordinary people because they will mostly be paid by high net worth individuals; 2. that FTTs will reduce speculation and uncertainty rather than increase it;
3. and even that overseas aid and tackling climate change is possible or desirable.

Here’s the timetable. This week at the European Council meeting, heads of government will still be debating both “whether” and “how”, and an FTT probably won’t be on the official agenda.

Next week, or in July, the European Commission will publish its impact assessment on FTTs (as well as other banking taxes) and will reveal that FTTs are feasible. The G20 summit in Cannes in November and the COP17 UN climate talks in Durban in December will probably see a coalition of the willing emerge – countries that are willing to start down the path of extending the FTTs that the IMF have already identified as being in place.

It will take 2012 and maybe 2013 for those taxes to be introduced, and a couple more years before it becomes clear enough that the sky has not fallen in for other governments to realise either that they now have cover to be brave, or reason to catch up.

By the time the world reaches the deadline for achieving the Millennium Development Goals in 2015, we should – at last – have the means to pay for them in place.

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Reader comments


Best of luck with convincing people “that the costs will mostly not be passed on to ordinary people because they will mostly be paid by high net worth individuals”.

Because, of coiurse, the costs will be passed on by the banks to anyone making financial transactions – and that will include ordinary people.

An FTT will, unfortunately, be passed on in the long term. Evidence suggests that it has little effect on volatility, and increases it if anything.

However, it could still make a good short term revenue raiser for some one off investment projects. They implemented one for a while after the crash of 1929.

1. Costs will *definately* be passed onto people and companies. Some you will see directly, but mostly you’ll see the increase in borrowing costs and the massive hit the pensions industry will take.

2. FTT will certainly decrease liquidity of markets, which will *increase* volatility.

3. WTF??

“350 holders of a PhD in economics signed a letter in support a year ago: the latest attracted over 1,000”

Erm…wow. A whole PhD in economics. I wonder what the sample size is.

“Even some banks now support the idea.”

A single, tiny French co-operative bank is going to charge 0.01% on it’s currency transactions only….when the spread they charge to tiny retail customers is 2-3%. Try that when a company needs to trade billions of fx in a year – their costs will go up.

“The Governments of Austria, Belgium, Bolivia, Greece, Luxemburg, Slovakia and South Africa are in favour. ”

I don’t know about the others, but South Africa have specifically ruled out an FTT.

“Two major multilateral institutions, the IMF and the European Commission”

IMF said it was possible, but not a good idea. EC have been looking around for ways to raise tax money on a European level. Hardly a surprise they like the FTT.

Institutions will definately shop around if countries place unilateral FTT’s. At least one UK bank already has plans in place to move to the far east in such a situation, given both HK and Singapore have both come out against imposing such a tax.

Seriously, this article is based on very weak evidence – even from the articles it links to. Think it bears more to owen Tudor’s hopes and dreams than any form of reality.

“By the time the world reaches the deadline for achieving the Millennium Development Goals in 2015, we should – at last – have the means to pay for them in place.”

But given that we’re going to meet the MDG targets in 2015 we don’t need the tax, do we?

What did you think of James Graham’s post on it circa the Curtis video?

http://socialliberal.net/2010/02/11/robin-hood-tax-beware-the-men-in-tights/

a charge has to go somewhere. It either cuts into profits or it gets passed on to the customer. I’m not, I have to confess, entirely clear what would happen precisely – there are lots of variables – but the Robin Hood Tax website doesn’t seem to want to enlighten me

Thirdly, and this is where I really start to get nervous, the Robin Hood Tax is not the same thing as a Tobin Tax. James Tobin’s proposal was intended specifically to attack currency speculation – not to raise revenue. The Robin Hood Tax, according to their own blog is intended to do the exact opposite.

Why does that make me nervous? Well because when it comes to taxes, I’m highly dubious about taxes on economic activity. Economic activity is a good thing: it gives people jobs (and meaning).

Also, won’t this make some futures-based forms of insurance (which are vital to some people find useful – not only nasty rich bankers but vulnerable poor farmers) unaffordable?

Tom, futures ain’t used by vulnerable poor farmers.

I’d be interested to know how revenue raised from the scheme would fit into discussions around climate adaptation funding. An FTT is one of the proposed mechanisms for funding that…

Tom,

‘Economic activity is a good thing: it gives people jobs (and meaning).’ (I’m aware you didn’t say this but I’ll respond to it anyway).

Economic activity is stock markets is not inherently a good thing. Yes, it can be used productively, but most of the time people are simply trading rights on pieces of property that they hope to extract rent from in the future. Demand goes up as prices go up and down as they go down, fraud, information asymmetry and other bad words are rife; just because people are buying and selling things, doesn’t make it good.

As for the farmer, well, yes he would pay the small percentage. But only once – an FTT would hit HFTs more and would also impact the more complex (dangerous) financial instruments multiple times.

1. that the costs will mostly not be passed on to ordinary people because they will mostly be paid by high net worth individuals-

The cost is almost unimaginable…

That FTTs will reduce speculation and uncertainty rather than increase it.

Yes it will reduce speculation! A tax of 0.5% or even 0.005% would put every trader i know out of business the dealers will have to widen there spreads to pay the tax and having to clear a 15-20 point move before you break even on the forex is not even laughable. Paying in tax more than you actually pay as a deposit to the broker in order to buy a position?

It will reduce speculation as thousand of traders are put out of business followed by hundreds of dealers moving offshore national governments will lose the tax revenue that should have been collected from those that have been driven away or been put out of business and that’s just retail traders, when it comes to big money funds there is no way on earth they can stay competitive and pay millions extra per week in tax.

But they wont be paying the tax will they, as soon as enough people have left the markets liquidity will dry up ( you know that evil thing? many people coming together to create an orderly price discovery process? ) you can buy and you can sell instantly because there is always someone on the other side to take what you are selling out of your hands, when this is no longer a quality of the market hedge/mutual funds and even large traders will not be able to accumulate positions over time without pushing up the price with there own activity and when they go to sell the price will collapse again… the markets will not function.

I am all for taxation yet this taxation will make the market unworkable, its all good and well quoting stamp duty and claiming its a success yet only RETAIL INVESTORS pay stamp duty and the government lose as much if not more because of it than it gains because of it.

The uk banks provide billions a year in tax the financial sector creates and supports hundreds of thousands of jobs when all this has left and Asia happily and rightly enjoys the benefits i guess then the socialists will realize there mistake but hey it worked for Sweden…they received about 3% of the figure they projected
as revenue from such a tax…

” During the first week of the tax, the volume of bond trading fell by 85 per cent, even though the tax rate on five-year bonds was only 0.003 per cent. The volume of futures trading fell by 98 per cent and the options trading market disappeared”

10. Mr S. Pill

@9

“thousand of traders are put out of business followed by hundreds of dealers moving offshore national governments will lose the tax revenue that should have been collected”

Source? Cos it seems to me this is the same nonsense that right-wingers always trot out time and time again and it has yet to be proven.

Also, if why is it when unions threaten to strike they are “holding the country to ransom” yet when banks threaten to withdraw their taxes it’s a perfectly acceptable notion to accept? Some very twisted morality at work here. Surprise.

Source? Cos it seems to me this is the same nonsense that right-wingers always trot out time and time again and it has yet to be proven”

Its apparent you have little idea of what you are talking…whatever some thing “seems to us” is determined by what we know of it and if we know so little what right do we have to an opinion when it comes to major change?

Source = common sense.. 0.5% financial transaction tax – market maker sells £100.000 worth of stock to a customer – market makers intention is to make a few PENCE on the spread – market maker now has £500 financial transaction tax to pay – market maker widens spread in order to cover cost.

Customer wants to buy £100.000 of shares his profit target is £1200…customer has to pay £500 tax when he buys shares- customer has to pay £500 tax when he sells shares…i know some traders who are wrong 70% of the time the reason they can turn up at the end of the year with a taxable profit is because they can afford to be wrong its not costing them £1000 a trade regardless if they are right or wrong but even if there existed a super trader who could be correct every single time the combination of tax he has to pay and widened spread would make it impossible to profit…ah but then we will only have long term investors..you say…that is good right?

Ignoring the fact the spread will remove so much profit and even a little selling pressure would cause the price to collapse because there are no longer active traders in the market to support it…no one is there to absorb the selling..no one is going to jump into a falling market and buy in uncertainty of a price reversal with overhead taxes of this nature…crash…

Even 0.05% would have a disastrous effect on forex spreads..at that % on stocks its workable unless your accumulating a position worth billions. There are corporations and stocks all over the world no one is going to pay millions of pound tax when they can take there business abroad where there is no such tax and capital gains tax is even lighter.With out the big players in the market there is simple no market.

“Also, if why is it when unions threaten to strike they are “holding the country to ransom” yet when banks threaten to withdraw their taxes it’s a perfectly acceptable notion to accept? Some very twisted morality at work here. Surprise.”

I do not agree with the unions using there power like that,you keep mentioning “the banks” as though there is one family who benefit from all…its not the banks money we are hearing proposals for a FTT..its the public’s money In the banks..the public work for the banks, the public’s pension funds,the services products and jobs that exist because of the banks,the countless traders who have spent years studying the markets in order to make a living from it….this goes a lot further than your concept of “the banks”.

If the government proposed to tax people for travelling to work each day and it was such an amount that the transport system could no longer function..the frame work in which is exists shattered…the unions would go mad about peoples right to travel to work..well guess what? The Unions cant move but the banks and any one who deals in finance can..and who is left to pay the missing tax bill..You

Tax the banks “profits” remember that old concept?..If the EU wasn’t so screwed, wasn’t facing the consequences of there single currency experiment and weren’t adamant on an ever increasing budget at a time when country’s are cutting back and going broke we would not be hearing this..country’s without financial centres that count are in aggressive support because they have nothing to lose. Very twisted morality at work here.

Hedge fund exodus costs UK £500m

By Sam Jones and Vanessa Houlder

Published: October 1 2010 23:00 | Last updated: October 1 2010 23:00

Britain will lose hundreds of millions of pounds in tax revenues every year as a result of top hedge fund managers moving overseas, with the departure of just two to Switzerland estimated to cost the Treasury more than £200m.

One in four hedge fund employees have left London to move to Switzerland, where the tax regime is considered more stable, according to the consultancy Kinetic partners.

The trigger for the departure of many hedge fund managers was the introduction this year of the 50 per cent tax rate on earnings above £150,000. But increasingly, they also complain about political attacks and regulatory uncertainty.

According to the government’s own estimates, one-quarter of all income tax received this year will be paid for by top earners subject to the new 50p tax rate

But the Treasury has acknowledged that the higher rate will yield less than one-third of initial projections, because of people moving overseas and the reluctance of high earners to come to the UK..

http://cachef.ft.com/cms/s/0/19d6e46c-cd97-11df-9c82-00144feab49a.html#axzz1Po5kcOCC

That”s a reaction to tax on profits,before you point out that they have a stamp duty in Switzerland please be aware that funds and institutional investors exempt just as they are in the uk which is the only reason it works – without stamp duty there would be millions more taxable revenue per year. If the proposed tax sees the light of day as i said sadly it will be unimaginable. Place a 1 pence tax on every £1000 that moves through a bank, cut all wastage when it comes to spending and create aid programs that work instead of programs that decades later still require billions a year and show no visible change

13. Just Visiting

no one seems to have raised the issue of how often something is traded – theres probably a technical term for this….

What I mean is: There are X shares issued in the uk stock market today.
How often is each share traded each year?

If the cost per transaction goes up – then to ensure gains are not lost in the costs, traders will trade less often.
Nano-second software trading will reduce.
Warren Buffet style of ‘buy and hold’ will not be impacted at all.

Question – does it matter?
Sure, traders that focused on short buy/sell durations will no longer be profitable – so jobs like that will be lost.
But does it matter that shares will be traded less times per year?

14. Just Visiting

assume my question is pre-faced ‘ if the whole world acted together’ – as enough folks have predicted disaster if only some countries introduce the tax.

Obviously it’s hypothetical – for all countries to agree on any one thing!

Share turn over is called the float turn over, if the only active members of the market are those looking for long term investments who is going to buy from them when that investment has reached its peak in price?….Short term traders will come in and take the stock because there focus is short term, it will get handed about until the stock in question lands in the hand of another investor with a long term out look and the price has gradually fallen to the next stage of its cycle.

Stock prices move in cycles – at the top of a cycle there is no longer long term demand – do we want a stock market crash every single time because there”s no one to absorb the selling? There are many functions of the market and each is vital even shorting, nano second trading software is fine, identifying two entity’s looking to buy and acting as the middle man making a penny a share..what do you think a market maker is?

” if the whole world acted together’”

The hole world will never act together on this some country’s put the financial health of there markets and people before there own big ideas and pet projects, they understand how damaging it is and don”t believe it to be fair..those country’s did not lend and waist so much money, left with nothing to show for it when the economy slows down and the rate of tax income struggles to balance the book.

Every one focuses on the banks…the banks bail outs are investments..its the government’s thousands of billions in debt that’s causing issues..but hey no one considers that.

16. Just Visiting

den

thanks for the correct jargon:

> Share turn over is called the float tur over

But your text is too generic to help.
You didn;t answer – how often is each share traded per year?

You paint a black and white picture – but surely it is grey.

With electronic trading advances – the turn-over is I assume much higher than say 20 years ago – but markets 20 years ago were not crashing more than now, were they?

So – if Robin-hood tax took us back to 1980 levels of turn-over – no harm would be done?

13. Just Visiting

” no one seems to have raised the issue of how often something is traded – theres probably a technical term for this…. ”

Churn.

” What I mean is: There are X shares issued in the uk stock market today. ”

Issued today is the wrong idea. The shares traded are in the secondary market and without a liquid secondary market new shares issued in the primary market lose their appeal. The best way to think about it is buying newly issued shares is investing as the respective company gets the capital. Buying shares in the secondary market is saving and is only exchanging currency for a claim against that company with the former holder of the claim.

” How often is each share traded each year? ”

Depends the company. The market for large FTSE 100 companies is more liquid and the spreads between the bid and ask narrower than smaller companies.

” But does it matter that shares will be traded less times per year? ”

It would for companies when it comes to a new rights issue. If liquidity dried up investors would demand a premium to buy the new shares as without a liquid market to sell into their risks and exposure is elevated. Therefore, companies would get less capital for the same amount of shares.

Anyway, none of this is aimed particularly at the stock market. They are aiming at derivatives, bond markets and the FX. Bizarrely, they can’t get their heads around the notional value of a trade is not the same thing as profit from a trade. They just hear that the FX turns over $3.5 trillion a day and lick their lips at the prospect of taxing turnover. It will go nowhere because the only governments that matter are the UK and US and they are never going to agree with the idea. Since most of the global financial trade is done through London and New York, it would be those two countries paying the tax. Hardly sounds fair to me that two countries alone should be disproportionately paying a tax. Moreover, not getting to decide where and how the tax is spent. The other countries of the world can feel free to impose any taxes on themselves as they see fit.

” The Governments of Austria, Belgium, Bolivia, Greece, Luxemburg, Slovakia and South Africa are in favour. ”

I am sure they are because it does not cost them anything. How about we impose an extraction tax on mining operations and see if Bolivia and South Africa agree. All those lithium and silicon deposits in Bolivia could fund a lot of the MDG.

Ultimately, what this comes down to is deceit. The MDG are laudable goals. However, those involved should have the confidence in their arguments to fund the goals from general taxation. Trying to fund the MDG with a FTT is a weasel admission that they do not have confidence in their arguments and are trying to fund the goals through a back door method hoping that the people who are paying the tax will not notice.

“But your text is too generic to help.
You didn;t answer – how often is each share traded per year?”

No i did not and it pains me you did not take 20 seconds to use a free financial website, correct term in hand and take a look over a few major corporations trading patterns to find out…your understanding is to generic to count and your to lazy to invest the time to gain a real understanding, this is how populations are directed to all sorts of miss-justices and truths…if 20 years ago or 100 years ago there was no one to absorb selling pressure the price fell flat on its face..the markets are larger now, there functions and psychology are pretty much the same its just with the increased activity, the frequency at which a share is traded increasing as much as it has done the markets have become much better…

“The supporters of a Financial Transactions Tax are so stupid even the ones who are doing so out of the worthwhile motivation of trying to rein in harmful unregulated financial activity do not realise that the Tobin Tax
specifically targets the CURE and the FUNCTIONING MARKETS, rather than the problem and the problematic markets.

The problem is mispricing and illiquidity. The solution is effective, continuous repricing, which is accomplished through high frequency trading. When that happens, people do not accumulate massive positions whose value is suddenly repriced: the repricing occurs continually,those markets will have already responded dynamically.

The Tobin Tax specifically penalises markets that reprice in a timely fashion.

If intervention is needed, it is needed to address those markets
which DON’T turn over a high rate of transactions – those markets where the price discovery mechanism is opaque rather than transparently continuous and automatic.

Imagine if the illiquid market in mortgage derivatives had been
subject to the kind of high turnover, high liquidity trading that we see in the currency markets. Those instruments would have been repriced far earlier, far more efficiently.

Look at the pound: the market has been giving feedback for a while,
has been sending distress signals, deterring overinvestment in the pound and demanding action. If the value of the pound had been unresponsive to fundamentals of our crazy public finances, if it had stayed high,then people would have continued to overallocate into the pound and the fundamentals would have continued to deteriorate until the wheels fell off, a la what happened with mortgage derivatives.

If a financially literate Intelligent Being had been asked to devise a fiscal or regulatory response to the credit crisis that was most specifically designed to damage the system, to cut away the meat, to leave the rotten aspects alone, to alienate the cure and to increase the chances of problems in the future, a Tobin Tax/Robin tax would have been the precise answer.”

“So – if Robin-hood tax took us back to 1980 levels of turn-over – no harm would be done?”

This is the market I looked at (aided by an economist who had worked in these markets.

FX turnover is the $3.5 trillion a day mentioned above. Spreads on a well traded pair (say, £/$) are about 0.5 bps these days. 0.005%.

Bacin in 1980 the same spread was 10 bps (an estimate but a reasonable one).

What compresses that spread? Lots of people trading of course.

OK, so, let us take your set up as a given. We add our 0.5 bps tax, that 0.005%.

This reduces turnover (as intended in the original, Tobin Tax, design) and spreads widen out to that 10 bps.

I’d note that I don’t think they would widen that much although they would widen.

So, we’re not getting 0.5 bps as tax on every trade that does happen. However, the spread is now 10 bps on every trade that does happen.

Every trade that is made ti exchange money to pay for an import, send dividends to a foreigner, lend money to the Third World, whatever, is now paying 10 bps rather than the former 0.5 bps.

That 10 bps is of course not paid by the banks. That’s money made by the banks. At least, it’s their gross margin on the trade. Who pays it? Everyone who consumes anything that has had an FX transation in its provision. Anyone consuming an imported product. Or one made from imported pieces, or who works to make exports. Or works for a company that does any of these things.

In short, it’ll be the general consumer paying this 10 bps.

So, now we need to note two things.

1) The economic burden of the tax, the incidence (note this is very different from who is sending the cheque in) is on the general consumer, not the banks. Indeed, from the numbers above, the banks might be making larger profits as a result of the tax (think classical economics for a moment. In a purely compeititive market we expect there to be very little profit at all as competition drives profits down to the pure cost of the capital employed. The FX market is about as close as we’ve got to such a pure competitive market. We’re deliberately making it less competitive, would be surprising to see margins and profits rise).

2) The burden of the tax is that 10 bps. That’s what it costs everyone, the existence of the tax. The revenue from the tax is that 0.5 bps.

So, the burden of the tax is 20 times the revenue from the tax.

This just doesn’t sound like a good tax, does it?

As I say above, I don’t think FX margins are going to blow out that far. But they will move out. And the same basic points will be true: the burden will fall on consumers and if the blow out of spreads is larger than the size of the tax then the burden will be greater than the revenue. And I think that last is inevitable, the first is simply obviously true.

I explained all of this immediately the original Robin Hood Tax came out. Owen Tudor refuses, point blank, to even discuss these points. For he knows he’s wrong but wants to be able to keep on campaigning.

And yes, various official reports have agreed with me on the incidence, not Owen.

Oh, and you know the point that they make about reducing speculation redicing price volatility? It’s tosh. As that report by hte same people who did Oxfam’s recent report tells us.

Tom, futures ain’t used by vulnerable poor farmers.

I don’t think the idea is that they’re out there on the trading floor 🙂 It’s that these futures enable cheap insurance policies – I don’t know how many poor farmers buy these (it depends on your threshold for ‘poor’), but their employers will, and that helps the workers by allowing a steady level of jobs as the farms know they’ll get a steady price.

Whole thing is totally pie in the sky. What about all the financial transaction which are just there for liquidity management, like money markets, FX swaps, repo etc. Going to tax them too?

If you do, you end up taxing those transactions which are used to do the day to day funding of banks….and in turn, the day to day funding of people’s mortgages etc.

If you put a 0.05% tax on financial transaction, it will add about 1.75% to the annual cost of a mortgage, based on the cost of money market lending. Think about that.

And of course, if you don’t charge the FTT on such transactions, i’ll simply structure my trades as forwards or repos and take the same punts anyway.

As far as I understood, the FTT concept is about reducing speculative churn in the markets by hiking up the transaction cost of trades. So this endless waffling about how the FTT will actually get passed on to end-users seems besides the point – I don’t think it’s about extracting excess profits from market-makers, it’s about extracting from hedge funds etc.

To be honest, I have no idea about how an FTT would work, or what it would cause, but there’s a strange sense of static overconfidence in some of the arguments regarding how mortgages costs will rise, and markets will dry up and the third world will suffer as a result of FTT: We live in a postmodern world, prices are arbitrary anyway, mortgage costs move up and down all the time based on subjective future perceptions, as do all prices in financial markets, and who’s to say that current dealer spreads are ‘correct’, and that a widening would represent some type of ‘aberation’. Yes, prices of transactions rise, and yes, those get passed on, and yes, that’s the point. Poor mortgage owners now have to pay more. Shame. As Chopper Reid would say, harden the fuck up.

@ 22 Suitpossum

But then the liberal progressive left would start whining about how unfair bankers charges are, how unaffordable everything this is now and how unfair it is all those rich people living in tax havens can pay accountants to avoid the FTT (which they will).

The more important point though is that it would drive inflation higher and wouldn’t be good for economies though. DO we really want governments to be spending even more of our money?

All I seek is chaos and destruction. I don’t speak for the liberal progressive left. Everyone whines in this world, not least the people who have the most to lose.

25. Robin Levett

Is it an unalloyed benefit to mankind that orders of magnitude more foreign currency is traded than is actually required for the underlying economic activity?

Is it an unalloyed benefit to mankind that we have many more jobs than are required to produce the material needs of society? I think to many jobs is a bad thing if we created a 200% tax on any job we feel is socially useless we will created 799 billion a year in tax revenue and make the job market less volatile.

I really give up, once a person has there head wrapped around an idea concerning an issue they have no involvement in or functional understanding there is no shifting it…Goood luck people

Den, if we want to talk efficiency of the job market, why don’t we start with why all my Cambridge friends who used to design jet engine systems are wasting their talent designing algorithmic FX trading systems – that’s a shortsighted and inefficient allocation of resources if ever there was one.

It is questionable from a long-run economic perspective whether maintaining a system that steers people who would otherwise be designing cutting edge start-up companies into generic trading roles is really a benefit to society. To my unsophisticated mind, it seems a one-way route to ensuring the UK’s future redundancy.

28. Robin Levett

@den #26:

Any chance of an answer to the question? There are obvious inefficiencies involved when the price of foreign exchange is not determined by the underlying demand for it and economic realities. What does betting on which way you can make the market move add to the deal?

“There are obvious inefficiencies involved when the price of foreign exchange is not determined by the underlying demand for it and economic realities. What does betting on which way you can make the market move add to the deal?”

The best guess of what the “true” price of anything is is the cumulative guess of everyone about what that value is.

People betting about what the value is is providing the information to everyone else of what they think that “true” price is.

This is the efficient markets hypothesis in its weak form….the form which is clearly and obviously true. Markets are efficient at processing the information about what prices should be in a market. They incorporate all openly known informaion nito those prices.

@Tim

‘This is the efficient markets hypothesis in its weak form….the form which is clearly and obviously true. Markets are efficient at processing the information about what prices should be in a market. They incorporate all openly known informaion nito those prices.’

I cannot stress this enough. EMH works best in markets where things are produced and consumed regularly. It starts to dither in things like education and health, and is completely blown out of the water in stock markets.

People are simply looking to extract future rent from what they are buying. Hence, price goes up, demand goes up, vice versa. Stock markets oscillate between euphoria and despair.

The important part: if you increase the amount of people playing the game, you make it *worse*, not better. So EMH simply does not work.

As an aside, I can’t believe anyone would believe EMH after 2008 – actually I can’t believe they would believe it after 1929. Also after the lance from Richard Thaler in TWC, 1992.

31. Just Visiting

Den

I’m afraid you’re un-necessary aggression

> your understanding is to generic to count and your to lazy

makes me suspicious that you are argumentrs are not so easily supported, and you know it.

32. Just Visiting

I meant:
: your arguments

33. Just Visiting

Tim

you make the assumption that trading levels will not change, even if the cost of trading goes up – in order to reach your 20 ratio.

On what basis do you make that assumption?

34. Just Visiting

Tyler

> If you put a 0.05% tax on financial transaction, it will add about 1.75% to the annual cost of a mortgage, based on the cost of money market lending.

Source for that? Why is a mortgage lender making so many trades?
They will surely make less, if the cost per trade goes up!

“you make the assumption that trading levels will not change, even if the cost of trading goes up – in order to reach your 20 ratio.”

No, I don’t actually.

If trading levels fall (which I obviously think they will do for that is why margins will widen) then it is still true that whatever is raised in tax, that 0.005 %, is swamped by the 0.01% spread.

In fact, the only way that what you say could be true, that the tax raised won’t cost more than the burden upon users of the FX market, is if trading doesn’t fall at all.

Which is absurd, of course, and is actually against the very reason that so many want the tax. So as to reduce trading.

Just in case you didn’t get it.

I talked about the ratio of tax raised to hte burden. Not the actual amounts of either.

– World proposes a tax somewhere.
– Tories, Regressives and Rich people shout “No, No! Not a tax! It’ll never work! The world will end!
– Tax becomes law.
– World does not end, bankers don’t move to Switzerland, the Rich still get richer.

It’ll be fine guys, breathe…..

“World proposes a tax somewhere.
– Tories, Regressives ”

Sue, do try to understand (even if you disagree with) my argument.

The FTT is itself regressive. Which is why I oppose it.

This little piggy sees a profit….
If he buys Copper this morning, he’ll have made 300,000 profit by lunch.
But no! Wait! Maybe he shouldn’t make the trade? After all, that extra £15 will really mess up his day.

Yeah right.

39. Just Visiting

Tim

Be patient with me here – just trying to understand,

> If trading levels fall (which I obviously think they will do for that is why margins will widen)

Ok – so if the margins were to go up 10%, and the number of trades where to go down 10%: then the total trading cost to everyone is unchanged.

The only people to lose out, are the merchant banks who get commissions per trade: but they get to keep the margins anyway – so they are happy too.

So back to my question – would it really matter if the number of trades dropped?
I’d guess that 10% would make no difference -trading levels fluctuate by more than that month to month anyway, in the light of oil price shocks and such global market news.

Is that right?
What about 50% reduction?

It’s not credible to assume that every current trade is vital to keep the markets volatile – is it?

I guess if some folks had their way the developing world would have to pay a tax on their hedges to raise revenue to send back to the developing world filtered through developed world NGO’s.

World Bank in push for food price hedging

The World Bank is taking the rare step of encouraging companies in developing countries to buy insurance in the derivatives markets against sudden changes in food prices with a deal that should allow them to hedge $4bn worth of commodities.

Robert Zoellick, World Bank president, said on Tuesday the “agriculture price risk management” tool showed what “sensible financial engineering” could do. “Make lives better for the poor.”

He added: “We have been in a period of extraordinary volatility in food prices, which poses a real danger of irreparable harm to the most vulnerable nations.”

Food prices were “the single gravest threat” facing developing countries, he added.

The facility will target the private sectors of developing nations, including farming co-operatives and food processing companies. JPM would offer simple hedging instruments.

The World Bank will underwrite $200m in credit risk under the initiative while JPM, one of the largest dealers in commodities in Wall Street, will take on a similar amount. The World Bank said this should enable countries to gain up to $4bn in price protection. The institution said other banks were likely to join later.

The use of financial insurance – or hedging – in agricultural commodities prices is common in the developed world, particularly in the US, Canada, Australia and France, and was behind the birth more than a century ago of the Chicago Board of Trade and others commodities exchanges.

But many developing countries have little experience of using derivatives, either at the sovereign or companies level.

Mexico, however, this year took the unusual step of disclosing it had bought futures contracts in Chicago to insure itself against the effect of rising corn prices on tortilla, a food staple in the country.

Egypt also hedged about a third of its wheat imports in 2008 by purchasing call options, contracts that give the holder the right, but not the obligation, to buy at a certain agreed price and date. Ghana, the world’s second-largest cocoa producer, also hedges its exposure to the price of the commodity. ”

http://www.ft.com/cms/s/0/caf1be36-9c2f-11e0-acbc-00144feabdc0.html#axzz1PxBbeZ64

“So back to my question – would it really matter if the number of trades dropped?”

In one sense, no. not very much. We’d just have slightly more clunky markets. Prices would be a little more off, move in slightly larger jerks when they do move. Not the end of the world.

“It’s not credible to assume that every current trade is vital to keep the markets volatile ”

Ah, this is where we need to explain a little more, obviously.

Part of the reasoning behind an FTT, something which dates back to the Tobin Tax days of the 70s, is this idea that highly liquid markets, ones with lots of speculation, are *more* volatile than ones which are less liquid, with less speculation.

If you read through the various docs getting behind the Robin Hood Tax thye all take this view. The original Austrain document, the one that Murphy did for the TUC, the RHT one itself, the Oxfam food report. All say that excessive price volatility is bad (probably true) and that too much speculation causes this so let’s have an FTT to reduce speculation and thus price volatility.

Now, when Tobin first proposed it, he had a point. For he was trying to find a way of supporting the world of fixed exchange rates which was falling apart under speculative pressure from the markets.

These days these people have no point here at all. The speculation, the liquid markets, they reduce price volatility. Bit of an odd one but bear with me. If politicians try to fix a price then speculation will make prices more volatile than that fixed price. For of course the intended price volatility is zero and markets will provide more than that. However, if we’ve a (roughly, relatively) free market determining the price then more speculation, more liquidity, reduces price volatility.

So, back to your point. “to keep markets volatile”….no, we’re interested in keeping them liquid in order to make them less volatile. Which is where the RHT people go wrong. An FTT will reduce liquidity. This will increase price volatility. And yes, price volatility is bad, which is why we do not want an FTT.

Tim, not to drag this debate further down the road of dull financial trivia, but this assertion that more liquidity naturally equals less volatility is quoted by economists like some law of nature. Indeed Tim, you in fact have just stated that like it was some uncontroversial, uncontested issue. It’s fair enough for you to believe that to be the case, but for you to casually state that this is so obvious is problematic: There clearly is a difference between speculation and excessive speculation. I easily understand the volatility reduction argument in the case of a market made up by, for example, 30% speculation, and indeed, I’ve experienced that in real life, but I’d love to see someone trying to make the argument for how, for example, 85% speculation reduces volatility. This world is made up of non-linear curves – it’s not apparent that more speculation naturally leads to less volatility, and maybe it’s worth couching your arguments is less black and white terms.

“but this assertion that more liquidity naturally equals less volatility is quoted by economists like some law of nature.”

No, not really. There are a number of theoretical attempts to show how “excessive” speculation increases volatility. There’s also been a large amount of empirical research into whether this is true.

It is indeed possible to construct theoretical universes in which speculation increases volatility. However, there’s no empirical evidence much to support them. The empirical evidence is rather that speculation reduces volatility.

A good round up of the research, both theory and real world, is here:

http://www.ntd.co.uk/idsbookshop/details.asp?id=1180

Start at page 28.

Note that this is in fact a paper purporting to support an FTT. From the same bunch who provided much of the back up research for Oxfam’s recent campaign, “Grow”.

There are two indings there that interest me.

1) Speculation reduces volatility.
2) Corporations do not pay tax.

As I’ve been saying for these past couple of years now about the RHT. Speculation reduces volatility and it won’t be the banks who pay the RHT.

This report therefore supports my major two criticisms of the RHT campaign. We’re reducing speculation in the name of reducing volatility, while in fact reducing speculation increases volatility. And for all the joy of taxing the banks of the banksters, we won’t be doing either. We’ll be taxing ourselves.

Finally, no, economists do not insist that it’s a law of nature that sepculation reduces volatility. As I say, in theiry, could go either way. It’s real world observations which show reductions. Just a hypothesis, always one open to being disproved by nasty facts.

My favourite attempt at this came from the World Development Movement report. They noted that back in 2007/8 rice prices were much more volatile than wheat or maize. They also noted that there’s much more speculation in wheat and maize than there is in rice.

Their conclusion was then that speculation increases price volatility. Now, OK, that might actually be true but it’s a remarkable conclusion to come to from that evidence.

44. Just Visiting

Tim

an aside -you say:
> it won’t be the banks who pay the RHT.

But that we know is a truism – we know it ends up being the tax payers who pay.
But despite that, people on all sides of the political fence believe that taxation is fundamentally normal part of what governments should do (with much debate as to how much and what is taxed of course).

And taxation, we all agree, is a way to influence behaviour – tax on cigarettes etc.

So there’s nothing relevant to the RHT debate, to be said about ‘who pays taxes anyway’.
So let’s leave that factor out, form now on?

“But that we know is a truism – we know it ends up being the tax payers who pay…….So there’s nothing relevant to the RHT debate, to be said about ‘who pays taxes anyway’.
So let’s leave that factor out, form now on?”

No, let’s not.

http://robinhoodtax.org/how-it-works

“The Robin Hood Tax is justice. The banks can afford it. The systems are in place to collect it. It won’t affect ordinary members of the public, their bank accounts or their savings. It’s fair, it’s timely, and it’s possible.”

They’re lying, aren’t they?

Worth calling them out on that?

What happened to ‘economics is not a zero sum game’ then, Tim?

We know it ends up being the tax payers who pay.But despite that, people on all sides of the political fence campaign and advertise this tax giving the impression to the general public that they wont pay a penny, it wont effect them in any way and hey even those bankers wont notice!

Just because government’s believe in taxation does that make it correct Just Visiting? Is it not the cause of the troubles we face globally right now? Are the alternatives not possible? Are we this narrow minded?

48. Just Visiting

Tim

> In one sense, no. not very much. We’d just have slightly more clunky markets. Prices would be a little more off, move in slightly larger jerks when they do move. Not the end of the world.

Ok, this is helpful – we’re getting away from what some have pitched here as very black and white.

We’re now all sitting together in the grey area – we agree that reducing the nunber of trades, is no big deal. (ignoring catastrophically large drops of course).

So the next question:

Becuse the cost per trade is so much lower now than 20 years ago – it means that traders can make money on smaller market movements. Not controversial.

Electronic trading means that trades can be timed to the second…millisecond: microsecond: nanosecond….

So the market is effectively creating ‘ new profit’ oportunities -purely down to the finer timing. Let me explain my thinking.
In the past, the price only changed say once per second: so with software that traded down to the 1 second resolution, you’d reached the limit of making money on movements.

But then technology improved, now the prices change every millisecond. So now there are price ups + downs within each second: a trader can buy and sell within 1 second and make or lose a margin (really very small one !).

Of course – this is a zero sum game (like all trading) for every buyer there is a seller paying the same price (less margin).

So although some traders can make money at the sub-second trading – for everyone that does, there is another losing money.

That is entirely a new area to ‘make a margin’ – new scope to speculate: with winners and losers.

And that possibility, drives new trades -that didnt happen before when prices only change once per second.

Hope I’ve made that clear.

And of course there are new opportunities to speculate when prices are tracked down to the microsecond granularity…and so on.

So the question is: apart from spoiling the fun of some traders who make a living out of trading short term…. no one would lose out, if the trading rules were (magically thru some hypothetical mechanism) changed so that you could only trade on 1 second price changes: and not tarck down to milliseconds.

Tim – would market liquidity be affected all in the this scenario?

If our pension funds no longer bought instruments that traded at sub-second values: then the pension funds lose the chance to make margin on such trades – but also no longer can lose money on them! (all trades are zero sum games: there is always one buyer for every seller).

Net result, pension funds returns for the public – not affected.

“What happened to ‘economics is not a zero sum game’ then, Tim?”

Dunno: not something I’ve ever said. Markets aren’t a zero sum game in general, voluntary transactions increase utility by definition.

Derivatives markets are zero sum games for the direct participants: for every speculator who makes a profit another must make an equal and opposite loss. However, these markets as a whole are not zero sum as they allow the transfer of risk from farmer/producer/consumer to speculator.

What I have said is that there are no solutions in economics: only trade offs.

“Tim – would market liquidity be affected all in the this scenario?”

Yes. Perhaps not very much but yes. And lower liquidity does mean more price volatility.

site:timworstall.com “the economy is not a zero sum game”

“site:timworstall.com “the economy is not a zero sum game””

OK, once then when explaining something to Murph. Still doesn’t apply here.

“Still doesn’t apply here” – yeah, in a thread about who pays a tax. Funny how that works, innit?

@ 34 Just Visiting

All banks, but most especially retail banks/mortgage lenders have to borrow money from the interbank market to make their books whole – they’ve lent more than the cash they hold, so have to borrow short term cash against their long term loans.

This is normally done on an overnight basis, as doing so on an unsecured basis is too credit intensive. It’s definately a financial transaction…and do it every day for a year and the costs quickly mount. Those costs will be passed to the end users – in this case mortgage holders – and it will be roughly 1.75% a year (annualised) on top of what they already pay.

@ 36 Sue Marsh

Clearly you are a moron.

Banks won’t end up paying the tax. Their customers will. Retail banking will become more expensive, mortgages much more so and it will raise the cost of doing business massively….which will suppress growth, and make everything you buy much more expensive. Oh, and that pension you saved for will be decimated as inflation will be much higher whilst your returns will be drained from the FTT.

All because you are jealous “rich people” make money through speculation.

@ Tim Worstall/Just Visiting

The volatility/speculation argument really depend on the size of a market. The particular markets I trade are semi-liqiud. Have a couple of the bigger banks/speculators effectively leave the market, as has happened, and price volatility increased dramatically as liquidity dropped. That wouldn’t happen if I was trading EURUSD FX though.

In most (of these FTT argumental) cases though people talk about volatility and specualtion in the same breath. Short term price volatility (intraday within 2 standard deviation) will be higher with more speculators/liquidity, but outside the standard deviation from mean it will be lower in the medium term (interday). In the long term though macro events tend to drive the price, fairly independent to both speculation and liquidity. Which is why 3-5 S-D events happen every few years when the models tell us they should be happening every few thousand, and “black swans” are so common.

54. Just Visiting

Tyler

> All banks, but most especially retail banks/mortgage lenders have to borrow money from the interbank market to make their books whole – they’ve lent more than the cash they hold, so have to borrow short term cash against their long term loans.

But what they borrow each night is a tiny percentage of their assets overall, surely.
It’s not like they are borrowing 100% of their total mortgage lendings each night.

So your 1.7% extra cost of trading due to a tiny RTT tax – is really just 1.7% of a tiny %.

So your figure of 1.7% seems highly misleading?

It’s really a fraction of a percent, so far as the cost on all mortgages would be?

Or have I missed something?

55. Just Visiting

Tyler

> Short term price volatility (intraday within 2 standard deviation) will be higher with more speculators/liquidity

You are saying that more speculators leads to higher volatility?
Tim never mentioned that?

Thats interesting tho – because traders like more volatility, as it gives more chance to make gains within the day…. so that attracts more speculators…which increases intraday volatility some more… sounds like a vicious circle…?

> but outside the standard deviation from mean it will be lower in the medium term (interday).

For non-statisticians like myself – can you unpack that bit….

And lastly – what sources have you for this behaviour?

56. Robin Levett

@Tim Worstall #29:

“The best guess of what the “true” price of anything is is the cumulative guess of everyone about what that value is.

People betting about what the value is is providing the information to everyone else of what they think that “true” price is.

This is the efficient markets hypothesis in its weak form….the form which is clearly and obviously true. Markets are efficient at processing the information about what prices should be in a market. They incorporate all openly known informaion nito those prices.”

With respect, all this is missing the point. What is the forex market actually pricing?

If I am buying and selling widgets, I want to know what the price of the currency is in terms of widgets now; I don’t want to have that price inflated just so that I can buy a chance of the relevant country’s central bank increasing or reducing interest rates over the next three weeks/months – I’m not going to be “holding a position” in the currency, I just want to pay a bill. Virtually all of the forex trading is speculation; and speculation on issues that have nothing to do with what exporters and importers want from the market. That is what I meant by inefficiencies.

“What is the forex market actually pricing?”

What is the value of £ expressed in $. Or € in Yen. Etc.

“I’m not going to be “holding a position” in the currency, I just want to pay a bill.”

You most assuredly will be holding a position. Absolutely no one pays the bill when they first sign the contract. So, you buy widgets from China, which are made of some bits made in China, some bits made in China from imported raw materials, some bits from Japan and a microchip owned by a US Corporation and manufactured in the Phillipines. If the widget was a cheap calculator say, or an electronic toy, this isn’t that far of what the actual supply chain would look like.

So in our supply chain we’ve Yen, $, renmimbi (or yuan) and whatever the Phillipine currency is. All of which need to be translated into a £ price for you.

So, you sign your contract today, they go off an make the stuff, ship it to you, 60 days later the container turns up at Felixstowe. Depending on how good your contract is, you might have had to pay FOB China, CIF Felixstowe or 30 days after receipt.

Someone, somewhere, along that line has quite a lot of currency exposure, is taking a position in currency.

How the deal is organised, how you pay, doesn’t change this fact. Somewhere between the original ordering of the parts and your paying the bill in £, the entire amount of the order is exposed to Yen, P$, $, Yuan and £ exchange rate fluctuations. For the 60-120 day time it takes to order, assemble, ship and wait or payment.

Could be you taking some of the risk, buying your widgets in $ but selling them in £. Could be the supplier, agreeing to charge you in £. Maybe the Chinese bloke is buying parts in $ and exporting in $ and only his wage rates are in yuan. But someone, somewhere, is taking those currency risks.

By buying widgets you have expressly and absolutely opened up a currency position.

And that’s what the FX market does. I can fix forward any of those currencies (much more difficult in yuan but still possible). I can go to a bank today and say, well, I’ve got this many £ coming in in 120 days and I’m going to have to pay out that many yen, this number of yuan, those P$ and that $ amount.

I’ll pay you a commission if you’ll set those rates now for money I’ll have in 120 days time.

OK says the bank and off they go and play in the forward markets. Swaps, futures, options, derivatives and all, and the risk of changes in those currency rates is, for a price, moved from you (or from the producer or both) and onto the shoulders of the speculators. That’s what they’re there for. To carry the risk that we’ve shifted from the people who don’t want currency position exposure to those who are happy to have it for a price.

In concept it’s no different from the farmer selling forward his wheat, the baker buying forward his wheat: we still need the speculators in the middle to carry that risk.

“Virtually all of the forex trading is speculation; and speculation on issues that have nothing to do with what exporters and importers want from the market.”

But the speculation allows exactly what importers and exporters want from the FX markets. The transfer of risk.

What you lot seem to be unwilling to accept,even unwilling to acknowledge is even if every negative thing you say about the markets and Forex were true there is not a thing that could be done about it.

We are in a global economy – if the government had spent the 1980s to date accumulating and creating functioning corporations that create value offering services and products, employing people in real terms, collecting funds that come from real exchanges in the economy instead of relying on taxation and dampening growth the situation today would be very different.

The government has the highest resources in the country available if they had intended to add to the economy by being a part of it and using profits to run the country taxation could have been Significantly reduced. The less tax people pay the more money they have to fend for them selves and the less they rely on government support, the less taxation a country has the more investment, business and opportunity that country draws in from abroad…

A perk to this is of course for such a system to function it would require highly competent people who know what they are doing – there ability would have to go further than a heart warming speech to sway the opinion of an ignorant public – having to balance a book of digits that came from your own labour gives one a realistic sense of its worth, unlike a child with its fathers credit card the country would be required to spend within its means, “save”, invest in things that Give a return and plan for the future – the current model is a one way route to redundancy.

Yet the current model is what we have and it requires tax, a lot of it – we live in a global economy if you make your self uncompetitive the money makers leave, last week London was called to make a 100 million transaction next week it will be HongKong its that simple….if speculation was the problem you incorrectly believe it to be the revenue lost by trying to correct that is a much bigger problem..we are not in the position to damage the system that creates tax in order to get tax how ever the EU are like a dog backed into a corner and will do anything they can to try and get out of the mess they have created regardless of the damaged caused.

59. Richard W

56. Robin Levett

” With respect, all this is missing the point. What is the forex market actually pricing? ”

Information. No market in the world comes close to the FX in terms of absorbing, distilling and reacting to new information.

” If I am buying and selling widgets, I want to know what the price of the currency is in terms of widgets now; I don’t want to have that price inflated just so that I can buy a chance of the relevant country’s central bank increasing or reducing interest rates over the next three weeks/months – I’m not going to be “holding a position” in the currency, I just want to pay a bill. ”

If you are trading widgets with buyers or sellers overseas you are exposed to currency risk whether you like it or not. If you are in the UK, you are naturally short sterling and long everyone else as a seller. As a buyer, you are long sterling and short everyone else.

So what you need is to hedge your exposure and to do that someone else must bear the risk. Hornby tried to do it themselves a few years ago and lost all their profit for the year on currency movements that went against them. Caterpillar over twenty years ago was so well hedged that they made more profit from currency hedges for two years than they earned actually making earth moving machinery. What you are really looking for is to neutralise new information that goes against you.

Information happens and can’t be wished away. Trade deficit/surplus information is released, retail sales numbers, inflation reports, interest rate changes and the daddy of them all is political instability. All positively or negatively impact your exposure.

” Virtually all of the forex trading is speculation; and speculation on issues that have nothing to do with what exporters and importers want from the market. ”

Most of it is speculation and that is to its advantage. The alternative is fixed currency rates that can’t adjust to new macro information and every one of those has eventually fallen apart. Moreover, with floating exchange rates, it is the speculators who were short a currency who stop the currency falling through the floor after negative news by buying to exit their shorts. Without the speculators there would be even more volatility as who wants to buy a currency in freefall.

60. Robin Levett

@Tim Worstall #57:

“But the speculation allows exactly what importers and exporters want from the FX markets. The transfer of risk.”

But the bulk of that risk is created by the speculation.

At root, currency is a way of mediating a barter; it makes it possible for me to exchange my widgets for food on the table. In the underlying transactions, the currency has no intrinsic value, it is a counter. Trading in currency attributes value to that counter independent of the value of the goods which ultimately it represents.

“But the bulk of that risk is created by the speculation.”

No.

Risk is created by price volatility. We also know that speculation reduces price volatility. Thus speculation reduces risk.

Circular argument alert!

63. Richard W

60. Robin Levett

” But the bulk of that risk is created by the speculation. ”

No it is not. The risk is there from fundamental differential macro conditions across borders. Blaming the speculators for the risk is like blaming speed cameras for speeding motorists. The camera captures what is already happening and volatility in exchange rates is capturing changing macro fundamentals. The speculators are attempting to bring the rate back to purchasing power parity. If too many speculators go too far and push a currency too low or too high, they create arbitrage for others who will bring the currency back to something closer to fundamentals. Speculators who sell sterling too much and as a consequence the exchange rate depreciates means the rest of the world can buy sterling assets cheaply. BP, Tesco, Barclays shares, gilts etc are simultaneously cheaper for overseas buyers. If the depreciation does not reflect fundamentals, the sterling assets must be more valuable than their home country assets. However, the very act of buying sterling assets brings the exchange rate back to an equilibrium of supply and demand.

” At root, currency is a way of mediating a barter; it makes it possible for me to exchange my widgets for food on the table. In the underlying transactions, the currency has no intrinsic value, it is a counter. Trading in currency attributes value to that counter independent of the value of the goods which ultimately it represents. ”

Yes, currency at heart is just a medium of exchange to barter commodities. Commodities in the widest sense is what we buy when we shop at the supermarket. The only intrinsic value currency should have or could possibly have is how many commodities does it buy. Some people like to believe it should be a store of value, I don’t. Interest bearing bank accounts and other financial instruments do the job of store of value. The fluctuating exchange rate is only reflecting that that currency value is changing in relation to other currencies because they are all traded in pairs. If the dollar depreciates the price of oil will rise and the pound in the GBP/USD pair will appreciate and buy more oil for each pound. However, if the fundamentals of oil changes for numerous reasons both GBP and USD will buy less oil.

64. Just Visiting

Tim

> Risk is created by price volatility. We also know that speculation reduces price volatility. Thus speculation reduces risk.

Yes – that is true – but the way you use that phrase is misleading.

You’ve already admitted that a reduction in trading will not necessarily cause an increase in risk.

To be more honest, shouldn’t your statement be:

” In general, speculation may reduce volatility – but levels of speculation could vary by large percentages and would make no difference to volatility.”

65. Just Visiting

Tim / Den

here’s one example that suggest to me that the statement ‘speculation reduces price volatility’ is intrinsically misleading – when phrased that bluntly.

The house price bubbles in the UK and USA – the market speculators priced in increases that they calculated the market would make: so the market went up – but the reality of the commodity on the ground was forgotten.
Market advisors produced reports such as predicting ‘average house price to be £1M by 2020’ !!

The speculators led each other down the garden path – the fact that there were so many speculators had no effect on reducing the volatility of that bubble !

Do you think if there’d been less speculators, the bubble would have been even worse?!

Can’t see any basis for supporting that angle.

Like I said earlier -I am suspicious that Tim, Den and some others are painting very
black and white pictures – that are misleading.
Whether the two of you are misleading yourselves and really do believe these mantras…. I can’t tell of course.
Neither can I tell if you don’t believe them, and you’re trolling and painting black_white just to enflame the debate.

But I just can’t these black and white statements as well phrased statements of truth.

JV

PS – to be anally clear here -not I’m not arguing here for the pros/cons of RHT or of an increase or decrease in speculation – so don’t go there when responding. I’m just making the point that you need to wrap your statement ‘speculation reduces price volatility’ around with a lot of caveats and explanations, before it can be considered relevant and honest to a debate on an issue like RHT for example.

66. Robin Levett

@Tim Worstall #61:

“Risk is created by price volatility. We also know that speculation reduces price volatility. Thus speculation reduces risk.”

Risk (for the widget buyer/seller) is created by the fact that changes that have nothing to do with how many widgets a currency can buy are priced into the currency; changes that have everything to do with valuation of the counters, qua counters, that I am simply trying to use as a medium of exchange.

“The house price bubbles in the UK and USA”

At least one economist (Robert Shiller) has written a whole book about how the house price bubble was an effect of insufficient speculation. there was no way of speculating short on housing, only of going long.

Most other economists think that there’s at least a grain of truth in his analysis.

Hmmm… I suspect that’s only a partial explanation of Robert’s argument. The irrational exuberance concept is an attack on efficient markets hypothesis, not an endorsement of the rationality of speculation. He’s tried to create his residential property derivatives to allow homeowners to short hedge property, albeit it’s the world’s most impossible derivatives market.

Onion future trading banned in 1958

http://www.adamsmith.org/images/stories/onionsoil.jpg Onion vs oil.

@ 69….true, but I’m not entirely sure that a post by me elsewhere is to be taken as unbiased proof of a contention I make here….

Deutsche Bank Commodities Team takes aim at the Efficient Markets Hypothesis today, in response to yesterday’s oil action by IEA:

“The IEA action could also be aimed at the odd nature of the oil markets- which often seem to hover in a technical equilibrium that is not necessarily related to supply/demand equilibrium. There is little evidence that $120/bbl for Brent is a stable short-term equilibrium given what we know about the economy. The IEA’s action might be viewed as an effort to kick the system into a lower ($100/bbl) equilibrium that might be more supported by industry costs and consumer affordability. Arguably. the IEA is trying to rebalance risk in the oil markets- adding some positive supply uncertainty into a market that appeared to favor an “I can’t lose being long” attitude on the part of speculators.”

They’re must surely be wrong, to challenge the allmighty rational pricing insight of all those clever people.


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