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Speculative Capital
Unit Three: The Role of Speculation
Study overview and general reading list
Concepts
Discussion questions
Reading excerpts
Online study group on speculation
Concepts
Henwood's definition of a speculator: "anyone who buys a financial asset in the hope of selling it at a higher price in the near or distant future" (Wall Street, p. 118)
These things we mean by term "speculative capital". Trading of fictitious capitals (?).
[Hedgers vs. speculators -- want to lump them together.]
[Fitting we are in Chicago: the CBOT and Chi Mercantile Exchange where a lot of this developed, in turn patterned on commodity exchanges developed to smooth out fluctuating agricultural prices] currency futures [May 16, 1972, Chi Merc Exch]
Emergence of "parallel banking system" other financial centers.
Some economic expressions:
-- corporate treasurers (already noted above)
-- flight of money from traditional, insured instruments to stock market. [review table in reading]
-- high tech industry -- esp software -- industries w/ no feeder industries. Production of value in software, but once the software is produced, virtually no production cost. Can assume a price only because of the monopoly granted by intellectual property law. In which case extra profits [stock market valuation of MSFT: $407 billion/ sales = $14.5 billion/assets = $22.4 billion; #2 GE $333 billion/sales=$100.5 billion/assets=$356 billion]
-- Internet mania in stock market ("These are extraordinary times") WSJ article
-- "The amounts traded in currency dwarfs the stock market. Some $1.29 trillion passes through the major interbank clearing house every day -- about 100 times actual commodity trade, and about 100 times the daily trading volume of the three major U.S. stock exchanges." (stats from Henwood)
-- securitization. Example of low income n'hood loan packages. Insure against weather.
By attempting to reduce risk, increases it?
[Remaking the world in their own image: Marx collective report on question 4.
[Report from Marx collective on article "Why Asian currencies tumbled so quickly."]
MAIN POINTS:
1. Speculators as part of capitalist class. To extent there is exploitation, participate in it.
2. Become dominant section of it. Control flows of money, control currency rates, affect viability of underlying economy [oil prices]
3. Only possible with an electronics infrastructure.
3. Dominance is expression of capitalism in age of electronics. To manage risk in global economy, but also exacerbates risk. [Manages risk w/in specific boundaries; but outside of those boundaries, becomes very unstable]
4. Represent an abstract connection to "real economy". Distant connection to production process.
5. Particpate in the transfer/redistribution of wealth, but not in production of it (??)
Discussion questions
What is the role of speculation in capitalism? What are the features of modern speculation? In what way can we say that speculation is an objective aspect of capitalism in the age of electronics? Do speculators exploit labor? Does speculation reduce risk? or increase it? [Report on Milman reading, Walter Wriston interview excerpt, and "Why Asian Currencies Tumbled So Quickly" article]
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The Role of Speculation: Reading excerpts
Walter Wriston, "The Future of Money", Wired Magazine 4.10 (1996)
Speculation definitions
The following text was from http://www.infinitytrading.com/Quest1.htm (link no longer valid). Try "Futures Trading: Commonly Asked Questions" at the same site for similar information.
1. What is the Purpose of the Futures markets?
The futures markets permit farmers, producers and owners of commodities (e.g., wheat, heating oil, sugar, gold, stocks, and bonds) to transfer the risk of growing and owning these commodities to futures speculators. Those who use the futures markets to transfer risk, such as farmers, are called hedgers. Speculators are those who assume the risk of a price change that hedgers seek to avoid. Speculators seek the opportunity to profit. When a speculator assumes price risk, this allows the hedger to concentrate on the more controllable aspects of his business, such as growing corn. Futures speculation is unlike most investments in that price movements are magnified by leverage, as a result of deposit requirements representing only 5-10% percent of the full contract value. Additional margin deposits may be required, depending on market fluctuations. Price changes adversely affecting the hedgers' physical position, such as the farmer's cornfield, can be offset by a comparable price change in the futures position.
The futures exchanges, no matter how they are organized and operate, exist because they provide two vital economic functions for the market place: risk transfer and price discovery, or for simplification, price information. The futures markets make it possible for those who want to manage price risk - called hedgers, and also for those individuals who are willing to accept the transferal of some or all of that risk - called speculators.
2. What is Hedging?
A primary economic function of the futures markets is hedging. Hedging is the buying and selling of futures contracts to offset the risks of changing prices in the cash markets, or where the commodities actually get bought and sold. This risk-transfer mechanism has made futures contracts virtually indispensable to companies, farmers and financial institutions around the world for over a century.
Hedgers are individuals or companies that own a cash commodity, or are planning to own a cash commodity (corn, soybeans, wheat, U.S. Treasury bonds, notes, bills, etc.). Therefore, these companies are concerned that the cost of the commodity may change before they either buy it or sell it. To alleviate some of that concern, they seek price protection by hedging the commodity. Almost anyone who seeks protection against unwanted price changes in the cash market can use the futures markets for hedging (i.e.) farmers, merchandisers, producers, exporters, bankers, bond dealers, insurance companies, money managers, pension fund managers, portfolio managers, thrifts, manufacturers, and others. Farmers hedge the price of their crops against the price going down. Heating oil distributors hedge the value of their heating oil inventory.
3. What is Speculation?
Speculators in the futures markets fulfill several vital economic functions by facilitating the marketing of basic commodities and the trading in financial instruments. Speculators do not create risk; they assume it in the hope of making a profit. In a market without these risk takers, it would be difficult, if not impossible, for hedgers to agree on a price because the sellers (or short hedgers) want the highest price, while the buyers (or long hedgers) want the lowest possible price. In addition to assuming risk, providing liquidity and capital, speculators help ensure the stability of the market. Speculators trade in the futures markets to profit from price fluctuations. The price of grain, for example, changes along with supply and demand. Plentiful supplies at harvest time usually means a lower price for grain. Higher prices may result from such things as adverse weather conditions during the growing season or an unexpected increase in export demand. Financial instruments fluctuate in price due to changes in interest rates and various economic and political factors.
When speculating in the futures markets, both profits and losses are possible - just as in owning the actual, physical commodity.
Speculators "buy contracts" (go long) when expecting prices to increase, hoping to later make an offsetting sale at a higher price, thus, at a profit. Speculators "sell contracts" (go short) when expecting prices to fall, hoping to later make an offsetting purchase at a lower price, again, at a profit. What is unique about futures is that a speculator can enter the market by either purchasing or selling a futures contract. The speculator's decision of whether he should buy or sell depends on his/hers market expectations.
The profit potential is proportional to the amount of risk that is assumed and the speculator's skill in forecasting price movement. Potential gains and losses are as great for the selling (going short) speculator as for the buying (going long) speculator. Whether long or short, speculators can offset their positions and never have to make, or take, delivery of the actual commodity.
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Implications
"The ebb and flow of fictitious values affect the overall economic structure in other important ways. Just as access to credit facilitated centralization of capital during the upswing, Marx observed that the resulting depreciation of paper capital 'in times of crisis serves as a potent means of centralising fortunes' (Marx 1967; 3, p. 468). Thus, it will contribute to the further growth of those businesses that are most integrated with the credit system, adding to the instability of the economy. In the process, the more that instability is introduced into the economy, the more firms find themselves dependent on financial institutions (see Marx 1967; 2, p. 107). These same financial institutions serve to reflate the fictitious values, thereby fueling renewed optimism. Thus, the crisis serves to reinforce the very processes that set the crisis off in the first place. " (Michael Perelman, :The Phenomenology of Constant Capital and Fictitious Capital", paper obtained from author)
"The plethora of capital arises from the same causes that produce a surplus population and is therefore a phenomenon that complements the latter, even though the two things stand at opposite poles -- unoccupied capital on the one hand and an unemployed working population on the other." (Marx, p. 359)
The following is from the Political Resolution, LRNA 3rd convention, 1998
Globalization and the limits of capitalism
Globalization is not a strategy for capitalists, a choice they freely make. They have no other choice if they want to continue to exist as capitalists. The capitalist has always had a limited number of devices for maximizing profit: cheapen production, expand markets, and speed up the circulation of capital. With electronics-based production, we can see each of these devices expressed in particular ways in "globalization": the drive towards a global labor market in search of cheaper labor; towards a global commodity market unimpeded by trade barriers; towards a global financial market to speed up the transit of money.
With electronic production, however, the capitalist's devices crash into absolute limits. The living labor component can only be driven to zero, and no further. As living labor approaches zero, circulation becomes impossible. Capitalist relations and markets can be expanded up to finite geographical limits; beyond that they can only be more intensely exploited. Regardless, production without wages destroys the market. Production without labor defines the conditions for the end of value and the destruction of the capitalist class. Today, we still obviously have production and value, and surplus value and profits. But the boundaries of capitalism are visible on the horizon of history, beyond which capitalism as a system can go no further. In this sense, we can say that this stage is the final stage of capitalism.
Globalization and productive capital
A substantial section of the capitalist class continues to try to profit from production. Investment in modern, capital-intensive factories has fueled a tremendous expansion of productive capacity in the world. Fierce competition forces corporations to cut their costs by utilizing more and more high-tech production. This results in the global economy producing more commodities than can be purchased. The connection between production and consumption is being severed, resulting in the inability to realize the value of the commodities being produced.
A few examples illustrate this glut of capacity: In the 1980s, Japan built offshore production equal to that of France. In the 1990s, Japan added still more capacity abroad, again equal to that of France. This expansion took place without regard for possible sales. China's productive capacity has also jumped, fueled by massive investment from the West. In 1996, it sold some $150 billion of goods abroad -- almost as much as Malaysia, Thailand, Indonesia and the Philippines combined. In the U.S., manufacturing capacity is rising at a 4.3% annual rate -- the fastest in 25 years -- while consumption is growing at only 2.5%.
With more technology and less living labor, not only is the profit rate squeezed, but the capitalist faces more difficulties in selling commodities, which also squeezes profits. Faced with shrinking returns, a section of capitalists begins to abandon the productive process, in hopes of accumulating capital through speculative activity.
Speculative capital
When money capital cannot be profitably invested in the reproduction of capital (i.e., production and consumption), it can become speculative capital. Speculators may trade in stocks and bonds, in anticipation of selling them at a future date at a higher price. More important, in terms of dollar volume, are currency funds. The amounts traded in currency dwarfs the stock market. Some $1.29 trillion passes through the major interbank clearing house every day -- about 100 times actual commodity trade, and about 100 times the daily trading volume of the three major U.S. stock exchanges.
The massive flow of funds effectively represents an "instant plebiscite" by speculative capital over national social and economic policies. Speculative capital demands the free flow of capital, anti-inflationary policies and maximum profitability from the productive sector. Through the International Monetary Fund (IMF), this sector of capital is able to force the restructuring of local economies to be more accommodating to its needs. Global harmonization of economic and social policy is achieved by forcing "neoliberal" policies on nations to open their economies to the full gale of global capital. "Opening up" means cutting wages, restricting unions, slashing social programs, privatizing public services and removing local controls over the economy and the environment.
In this way, speculative capital emerges as the leading sector of the capitalist class that controls the world's economy. Speculative activity exists in a world where productive activity obviously still takes place. It intermingles with productive capital, and movements of speculative capital respond to and reflect the underlying motions of various national economies. But the abandonment of production in favor of speculation is symptomatic of the emergence of production without value which characterizes the final stage of capitalism.
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