In a word, the great speculating fever which breaks out every now and then in the country, had raged to an alarming degree, and everybody was dreaming of making sudden fortunes from nothing. As usual the fever had subsided; the dream had gone off, and the imaginary fortunes with it; the patients were left in doleful plight, and the whole country resounded with the consequent cry of “hard times.”
Ever since its development in the dim recesses of our species’ past, money has exerted a very peculiar attraction on countless individuals who have come under its hypnotizing sway. The human desire for money – for something that has little or no use or value in itself but can be exchanged for other things that are more useful than money – is a trait that very clearly distinguishes us from all other animals. As the behaviourists have shown, other animals are capable of forming associations between two different and otherwise unrelated things, such as the ringing of a bell and the appearance of food; however, they are not capable of representing one thing by another that is completely different from it. The ability to represent one thing by another, which allowed us human beings to create the model of monetary exchange, is the same ability that is at the heart of all languages, where a sound or visual symbol takes the place of an object, action, quality, or some other aspect of the world in which we live. It is also the origin of all artistic and religious symbolism and representation. I suspect the worlds of other animals are much more literal and concrete than ours, and hence much less rich in symbols, metaphors, representations, and hidden meanings.
Of all living creatures, only human beings exhibit the tendency to be immoderate in their desires. Whereas other creatures are satisfied if they have enough to eat, a secure shelter to protect them from the elements and predators, and a mate with which they can procreate, human beings have innumerable desires that in no way contribute to their survival. It is only we supposedly intelligent and superior human beings that amass heaps of useless or trivial articles, such as certain kinds of stones and metals, which we cling to as if our lives depended on them.
The desire for money, since it is an entirely artificial desire, unlike the desires for food, water, security, shelter, and sex, is an example of an imitative desire that results from and is strengthened by seeing or hearing of other people who have lots and lots of money, as well as the many different things that can be procured with it. The excessive desire for money, called greed or avarice, has usually been condemned, in all times and places, as foolish or immoral. Many are the traditional tales told about avaricious individuals who were either ruined or made unhappy by their greed, or who reformed and led happier lives following their reformation.
Besides its many other peculiar features, what is curious about the present age is that this traditional belief in the perniciousness of greed has been inverted. Today, greed is celebrated and stoutly defended by the possessors of money and their many admirers, while much of the human world is gripped by a veritable frenzy of money-making and spending. At no time during humanity’s long history have the rich been as celebrated and envied, and their lifestyles emulated, by so many people as they are today. Given this feature of modern society, as well as the extreme degree of competitiveness that exists in some societies, it is hardly surprising, then, that making money, and making as much of it as possible, has become the primary objective of more and more people around the world.
Everyone knows that one way to make money is by working, by doing some kind of labour that produces something that other people want, or by providing a service that other people are willing to pay for. But there is another way to make money – namely, speculation – that is only available to those who have extra reserves of money – in other words, the rich. This is the alchemy of making money from money. And because only those who have excess money can use this method to make their money grow, it is one of the primary reasons for the greater and greater divide that separates the rich from the poor: for while the poor can labour, they cannot invest and speculate.
All speculators know that the greater the number of people who want to buy something whose quantity is fixed or limited, the higher will be its price. This is the basic economic law or model on which auctions are based. It explains why certain renowned wines fetch such high prices, and why diamond companies carefully limit the supply of diamonds so their prices do not drop precipitately, below the amounts that people are accustomed to paying for them, which would diminish their value in many people’s estimation.
When people see the price of something, such as a company’s stock, go up significantly in a short period of time, this attracts more buyers or speculators, which drives the price up even higher, at least for a time. But sooner or later there arrives a point where there are no new buyers, or not enough of them to maintain the inflated price of the object in question. Then the price will remain stable or go down, in some cases tumbling as quickly as, or even more quickly than, it rose. This is what has happened during the swelling and bursting of every speculative bubble that has occurred throughout history.
Both the swelling and the bursting of any speculative bubble is due entirely to our imitative nature: people buy things like gold, stocks, artworks, or real estate partly because they see other people making money from buying and selling them; similarly, they sell them when other people start to sell them, which causes the price of whatever it is they own to drop precipitately, thereby causing a panic or pandemonium. All other earthly creatures have not the slightest interest in participating in speculative frenzies. A donkey will not act on a stock tip, a shark has no interest in buying a plot of ocean real estate, and rabbits do not buy and sell futures in carrots, even though many of them are very fond of eating carrots.
Every speculator who has money and observes the model of the price of something going up, whether it is a company’s stock, famous artworks, or real estate, comes to believe that one will also be able to make money by buying that thing. It is the speculators’ collective greed that pushes the price of the thing higher and higher. But like moths that are attracted to a bright flame, while some of them are able to make money, others are burned and lose money.
So what exactly is going on in all these speculative frenzies? To put it simply, money is merely being transferred from one individual or company to another, while the ownership of certain things, such as shares of a company’s stock or some other financial instrument, an artwork, house or other kind of residence, land, gold, precious stones, or large amounts of a commodity like oil, coffee, or cattle, is transferred in the other direction. In other words, there is a vast redistribution of money taking place, while the objects that are bought and sold act as value tokens, just as in a game of poker. But unlike in a game of poker, where the value of the tokens is fixed and does not change, the value of these material or financial tokens can change, going up or down, depending on the particular state of the market at any given time.
We can picture all these financial speculators as players sitting around a table trading all kinds of different things with each other – stocks, bonds, treasury bills, futures contracts, derivatives, real estate, private companies, oil or mining concessions, and so on – with some players cashing in their chips and leaving the table while new players join the game. Moreover, some of the players may acquire more money with which they can buy and sell from a variety of sources such as work, an inheritance, wealthy clients who entrust their money to them, or by borrowing money.
The original function of finance and credit was to provide entrepreneurs and consumers with the necessary financial capital with which to fund their ventures or expensive purchases such as houses and cars. However, in recent decades, the moneymaking aspect of finance has become predominant, so that the emphasis is now on making money, no matter how that money is made. Hence, whatever financial investment or product can earn the most money is purchased, even by commercial banks, which are entrusted with people’s savings, pension funds, and other kinds of funds, regardless of the risks involved in buying and selling these products. These risks are often not well understood by those who are engaged in buying and selling them. In some countries, this has led to an abandonment of the traditional rules and practices that provided stability in the country’s financial sector, so that increasingly, this sector is now a source of instability that can adversely affect other industries and sectors of the economy.
The tidal wave of deregulation that began in the 1980s in the United States under Ronald Reagan, who, in my opinion, was a disciple of Ayn Rand, and in the United Kingdom under Margaret Thatcher, who was an avowed discipline of Friedrich Hayek, both of which theorists were strident proponents of rigid free-market principles, has increasingly delivered control over the world’s economy to the financial alchemists who claim that they have figured out the secret of how to make money from money, and, moreover, that we will all get rich – or at least they and their clients will – if we only let them perform their financial alchemy without interference.
The construction boom that gripped parts of Spain in the 2000s was due primarily to speculators who, seeing the rapid and continual rise in real estate prices, likewise joined the construction frenzy, until there was a glut of new buildings in the market. The participants in the Spanish real estate market did not behave like the mythical rational creatures whose behaviour is studied by economists, for in that case they would not have built more buildings than were actually demanded by the market, that is, by potential buyers. But instead, they foolishly believed that the meteoric rise in real estate prices in Spain would continue forever, or at least until they had made a profit or recouped the costs of their construction, much of which was financed with borrowed money. And it is precisely this practice – when speculation takes place with greater and greater amounts of borrowed money, which is more likely to occur the longer a speculative bubble continues to expand – that creates a chain of interrelated links that, when one or more of the links suddenly breaks, causes the rest of the heavy financial chain to fall crashing to the ground. What these and other speculative bubbles show is that when speculative demand makes up a significant part of the demand for something, it can send the wrong message to the market by making the participants in the market believe that the demand for it is greater than it actually is. In other words, by distorting prices artificially, excessive speculation can make markets function inefficiently and irrationally.
Another example of the distorting effect of speculation on prices is the recent rise in the price of oil to more than $100 per barrel. Because many oil producers did not realize that a significant part of this increase, fueled, no doubt, by predictions that the world had reached the peak of oil production, was due to speculation rather than to an increase in the practical demand for oil, they increased oil production to the point that its price dropped substantially, to less than half of its highest price.
As Michael Masters, an American hedge fund titan, pointed out back in 2009, for years there had been something fishy about the fact that commodities didn’t seem to be rising and falling on supply-and-demand dynamics alone. In Senate testimony on the issue of market speculation back in 2009, Masters said, “US economic output was dropping during the first six months of 2008. During that time, the worldwide supply of oil was increasing and worldwide demand for oil was decreasing….And yet, despite this glut of unwanted oil, the price has risen an amazing 85 percent per barrel.”
In 2000, physical hedgers accounted for 63 percent of the oil futures market; speculators accounted for the rest. By April 2008, those percentages had shifted to 29 percent and 71 percent respectively. Speculators now controlled the market.
It would be useful in industries where speculation makes up a significant part of total demand to distinguish between the practical and speculative demand for a product, the first of which is due to people’s or companies’ desire to use or consume the product, which demand remains relatively stable and generally tends to increase with time due to the world’s constantly increasing human population, while the second is due solely to some people’s desire to make money from buying and selling the product, which can cause its price to go up or down rapidly and for no apparent reason, other than the fact that the price is going up or down. In real estate, for example, these two kinds of demand have very different effects: whereas practical demand leads to people living in or renting out the properties which they buy, speculative demand often leads to these properties remaining empty. Whenever speculative demand makes up a significant part of the total demand for something, it will tend to raise its price, at least for a period of time, which is precisely the effect that the speculators want to produce so they can later sell it for a profit.
Anyway, from 2003 to July 2008,[…]the amount of money invested in commodity indices rose from $13 billion to $317 billion–a factor of twenty-five in a space of a little less than five years.
By an amazing coincidence, the prices of all twenty-five commodities listed on the S&P GSCI [Goldman Sachs Commodity Index] and the Dow-AIG indices rose sharply during that time. Not some of them, not all of them on the aggregate, but all of them individually and in total as well. The average price increase was 200 percent. Not one of these commodities saw a price decrease.
“What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets…corporate and government pension funds, sovereign wealth funds, university endowments, and other institutional investors. Collectively these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.”
The failure to make the important distinction between practical or use demand and speculative demand can lead a company to make a faulty decision, such as increasing the production of the commodity in question in the belief that the price will not drop below its present level, or not drop significantly below it, or that it will continue to go up, as it has in the recent past.
To understand what happens in the formation of a speculative price spike, or what could be called “the anatomy of an SPS,” speculators will enter a market when they see the price of something going up. But as the price goes up, then, in cases where this is possible, suppliers will increase production or new suppliers will enter the market, lured by the higher prices. Eventually there will come a point when the demand due to an influx of new speculators, or the easing of lending restrictions cannot be eased any further, in the case of those who are buying the commodity with borrowed money, will be roughly matched by the increased supply, at which point the price will peak. But since this price is significantly higher than the earlier price, new suppliers will continue to enter the market, which will cause the price to start falling. As the price starts to fall, the short sellers will seek to make money by selling the commodity short, which will cause its price to decline even further. Those speculators who entered the market late and lost money will of course not be inclined to speculate in this market again, at least not in the near future. If there is a steep drop in the price, which is all the more likely due to the fact that there is an excess supply that must be consumed, then the market will more or less revert back to normal, perhaps at a lower price than the one at which the speculative price spike began, with the majority of speculators looking elsewhere for the next chance to “make (or lose) a killing.”
Of course, the situation is more complex, less uniform, and certainly less predictable than these sorts of tidy summations that economists like to give for the behaviours of a very large number of people. But as we can see – and this is the key point to understand – when it makes up a large portion of total demand, speculation has a distorting effect on prices and production, and therefore a high degree of speculation can make markets behave inefficiently, since producers usually do not distinguish – and sometimes have no way of distinguishing – between the speculative demand for their product, which they would do well to ignore, especially in regard to their long-term plans, and the actual use demand, which is what they should primarily pay attention to.
In her book Hedge Hogs, on the largest hedge fund collapse in history, Barbara T. Dreyfuss describes the significant inflationary effect that speculators had on the price of natural gas in North America after energy trading was deregulated in the United States.
Shortly after the CFMA [the Commodity Futures Modernization Act, which deregulated most energy trading in the United States] passed [on 15 December 2000], the price of gas, which had been between $2 and $3 per MMBtu for years, suddenly spiked to more than $9, and the speculative energy trading business took off. In particular, gas became the most volatile commodity traded.
As we can see, the economist’s equation for determining prices is incomplete because we also need to take into consideration the distorting effect of speculation on prices. It follows from this discussion that the fundamental free-market belief that deregulation will always lower a commodity’s price by increasing competition and thereby increasing efficiency in the industry is not necessarily true because economists have overlooked the effect that speculation can have on raising its price. In other words, deregulation can lead to higher prices when speculators start to buy and sell large amounts of the commodity. In turn, this can lead to highly volatile price swings, and also to total supply that significantly exceeds total use demand, which can subsequently lead to a collapse in the commodity’s price.
The belief that a rising market will continue its upward trend without at some point declining is clearly not rational. And yet, it is precisely these same irrational individuals who adamantly argue against any interference in the market, meaning in their day-to-day operations, claiming that it is unjustified because any interference in the free market is a violation of the sacred rules of free-market capitalism and is therefore wrong, unwarranted, and unnecessary.
The vast sums of money that circulate around the world, like schools of voracious sharks looking for their next meal, meaning the next “investment” opportunity, have the potential, like a flood or tsunami, to inundate a country’s inhabitants, causing much harm and leaving death, destruction, and mass unemployment in their wake. We have witnessed this scenario repeatedly in many countries around the world over the past several decades, where greedy speculators artificially inflate the price of a country’s stock or real estate market, creating a bubble that eventually bursts, which then precipitates a panic, followed by an economic crisis or recession. It is these speculators’ inordinate greed, coupled with their strong desire to make more money than their competitors, that is responsible for creating the financial and economic instability and turmoil that have made headlines in recent decades all over the world.
After 1990, investors in the world casino became more predatory. Nowadays they move in packs, invest heavily, make big profits, are extremely ambitious, and fly into panic at the slightest hint, not of losses, but of diminished returns. They tend to invest disproportionately in countries that become their favourites but, at the first cloud, they flee in a stampede leaving their previously cherished emerging currencies and economies devalued and devastated. In 1994, a capital stampede made Mexico insolvent; in 1997 another capital stampede turned economic tigers, including South Korea and Malaysia, into vegetarians and inflicted harsh punishment on the underdeveloped economies of Thailand, Indonesia and the Philippines.
The stock market today is ruled by so-called institutional investors—pensions, mutual funds, hedge funds, and, especially, hedge fund “activists”—investors who buy up large stakes in companies and then seek to influence share price. For these big institutional players, which collectively control around three-quarters of the shares of big, publicly traded companies, the hunt for yield is life’s overriding goal. To prosper—indeed, to survive—the institutional investors must please their own clients (everyone from retirees to billionaires), and this they do by setting aggressive quarterly “return targets” for their portfolios—targets that, as economists Eric Tymoigne and Randall Wray have pointed out, are generally well above the growth rates projected for the American economy as a whole.
In order to attract more clients than their financial competitors, fund managers make promises of higher and higher growth rates, which competition sometimes leads them to pressure a company’s executives to do things to increase the company’s stock price in the short term, but which are not at all in the company’s – or its workers’ – best long-term interests. Hence, it is unbridled financial competition, with everyone demanding more, more, more, that has led to this irrational and sometimes dangerous situation, where many investors have completely irrational expectations about speculative and economic growth, since speculative rates of return are often significantly higher than the rate of growth of the real economy. It should not be forgotten that it is the real economy, and not the financial sector, that is the true generator of wealth. In recent decades, due to deregulation and changes in tax codes and tax rates, the financial sector has enabled some individuals and corporations to siphon off a significant part of this wealth for themselves and their clients, as this sector increasingly abandons its tradition functions that, according to standard economic theory, help the rest of the economy to grow and many individuals to prosper.
There is no government anywhere that would allow its country’s gamblers to dictate the laws and rules of its country. And yet, we are allowing the financial speculators of the world, many of whom are in reality just a more respectable species of gamblers, to gain more and more power and control over the world’s economy. Speculators oppose government laws and regulations because they would interfere with their ability to make money through speculation. And yet their collective actions can cause panics, crashes, crises, and recessions when they, like the imitative creatures that they are, collectively sell off their investments in a frenzy in the attempt to minimize their losses, after they have created the speculative bubbles that can dangerously inflate the prices of things like stocks, commodities, and real estate.
Since one of the most important functions of any government is to protect its citizens from the harm that can be done to them by others, governments are entirely justified in their efforts to check, reduce, minimize, correct, and mitigate the significant harm that financial speculators can do to a country’s economy. It would be one thing if these speculators, like compulsive gamblers who lose large sums of money and ruin their lives by their addiction, were the only ones that suffered from their actions; but the fact, which has been demonstrated repeatedly in the past, is that their actions can harm many innocent people who have not participated in their unwise and reckless activities.
Wherever it is legally transacted, the activity of gambling creates jobs and provides governments with some of their tax revenue. But no one would argue that this economic sector should not be closely regulated and controlled. The same holds for financial speculation of all kinds, for it too should be taxed, monitored, regulated, and controlled, in no small part to prevent or mitigate the potentially harmful effects of speculative frenzies that create speculative bubbles that, when they burst, can cause considerable harm to a country’s inhabitants.
We must stop believing the capitalist fairy-tale version of what, according to the dim-witted economists who foolishly believe that we are all rational creatures who would never take unwise risks with our own or with other people’s money, is taking place in financial markets, and examine what is actually happening when people speculate with large sums of money. For in the difference between the economists’ mistaken conception of reality, according to which all forms of financial speculation count as investments that help the economy to grow, and what actually happens in the real world lies the crux of the matter, a difference that can ruin lives and cause economic devastation when human greed is allowed to operate unchecked, unrestrained, uncorrected, and unpunished, in the mistaken belief that it will produce the best of all possible economic worlds.
 Devil Stories: An Anthology, “The Devil and Tom”. Selected and edited by Maximilian J. Rudwin. Alfred A. Knopf, New York, 1921.
 From its original meaning of sexual desire, the extension of the word “cupidity” also to mean the strong desire for money was a linguistic mistake that only begot confusion, since Cupid was the Roman god of love. First of all, these two desires – the desire for money and the desire for sex or love – are very different from each other, just as they are also different from the desires for food, pleasure, drugs, and fame. Moreover, while no lover would be satisfied with possessing a mere pictorial representation of the object of one’s love or lust, there are many avaricious people who are satisfied with possessing large amounts of money, that is, with possessing a representation of or substitute for all the different things that can be procured with it. Those individuals who originally misused the word “cupidity” in this fashion did a disservice to other English speakers by denoting two very different things by the same word. Following their careless example, one might as well call a lion a tiger, or denote hunger and thirst by the same word, or give the same name to two or more of one’s children.
 Although it is true that many more individuals now own speculative commodities like stock shares – for example, it is estimated that more than half of Americans now own stocks – the truth is that the majority of stocks are still owned by the wealthy.
 This explains why it is not possible to charge people for oxygen, even though it is vital to the survival of every human being on the planet, even more so than food and water: because, although we and all other animals use it each time we breathe, thereby diminishing its quantity, it is constantly replenished by plants and other oxygen-producing organisms, so that its total quantity is not limited. However, there are some individuals who have difficulty breathing, and so require access to a more pure form of oxygen, or who venture into places, such as underwater, where, because it is dissolved in the water, the oxygen is in a form that they can’t use, and so these people can be charged and are willing to pay for it.
 One important difference between games of chance and speculative financial activities is that there exists nothing beyond the game itself. When the game is finished, the players cash in their chips and it is clear which players have won and which have lost money, at least in that particular game. However, in the game of real estate or stock market speculation, there exist the properties or companies whose stocks are bought and sold, which are real and which, provided they continue to exist or remain in business, provide a measure of stability to real estate or stock prices. In cases where a parcel of real estate or a company’s stock sells for several times more than, or for a fraction of, the price it was selling for only a short time ago, without any underlying change in the property or company, then these changes in its monetary value are clearly due primarily or entirely to speculation.
 In some markets there is a mix of buyers who buy the thing solely or chiefly for its practical use and some who buy it solely for the speculative goal of making money from their purchase or investment, that is, to make more money with their money. Of course, these two desires are not exclusive, and many buyers, such as of a house, intend to live in it while they also consider it as an investment, whose price, they hope, will go up. Hence, they may do things to increase its value, such as by making it larger or installing the latest housing fashions and technology.
 To continue the analogy with games of chance and skill like poker, where the players know whom they are playing against and that the only way to win is by outwitting one’s opponents, stock market speculators and other kinds of speculators know that the way to make money is by buying before many other people want to buy – that is, when the speculative bubble is expanding – and selling before many other people want to sell – that is, when the bubble is deflating. This is the “work” that is done by those who work in the speculative financial industry. To those who would object that my description is belittling of the entire financial sector, first of all, I am speaking only of those who work in the speculative part of that sector, and not the part that actually helps the non-financial part of the economy to grow; and second, it also requires considerable time, study, and effort, not to mention good judgment and steady nerves, to become an excellent poker player. But who would hold up a champion poker player – or any other kind of gambler – as a model of human endeavour, as a great and worthy human being and someone who should be emulated by people all over the world? And yet, many financial speculators are regarded today as great individuals because they are well versed in the speculative art of making large amounts of money from money.
 Henry Kaufman, who worked during many decades in the financial industry in the U.S., has written an informative book on the dangers of financial speculation, among other subjects, entitled On Money and Markets.
 It was not just the developers or construction companies that were lent large sums of money to finance the construction of new properties. Buyers of these properties were also provided with large loans to finance their purchases. In both cases, on the production and consumption sides, the participants in the Spanish real estate market were putting very little of their own money into these transactions. Their optimistic behaviour was based on no other real-world phenomenon except the fact that others had profited by doing what they were doing, and so, like a gambler that has had a string of good luck, they believed that they too would profit from doing so.
 Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar, chapter 6. Crown Business, New York, 2016.
 Ibid, chapter 6.
 Of course, it is also possible to make money when the price is declining by selling short the commodity. Both buying in the hope that the price will go up, and selling short in the hope that the price will go down, have the effect of increasing the size of the price swings of a commodity, which means that its price will be more volatile the greater the number of speculators there are in the market. In other words, a commodity’s price volatility will give a rough idea of how much of the demand for the item is due to speculative demand, since what I have called practical demand is usually more stable and does not vary to as great an extent in the short term.
 Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History by Matt Taibbi, chapter 4. Spiegel & Grau, New York, 2010.
 Makers and Takers, chapter 6.
 Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster by Barbara T. Dreyfuss, chapter 10. Random House, New York, 2013.
 The Myth of Development: Non-Viable Economies and the Crisis of Civilization by Oswaldo de Rivero, p. 59. Second edition. Translated by Claudia Encinas and Janet Herrick Encinas. Zed Books, London and New York, 2010.
 The Impulse Society: America in the Age of Instant Gratification by Paul Roberts, pp. 92-93. Bloomsbury, New York, 2014.