Speculative versus Real Growth: How to Reform the Stock Market

There are different kinds of speculative investments, such as real estate, fine artworks, precious metals, stock shares, bonds, derivatives, and other financial investments. Although there are differences between them, there are also important similarities. In addition, although there are similarities between speculative investments and money, there are also differences which I wish to emphasize, for these differences have significant effects on economic matters, human behaviour, and important societal measures such as inequality.

The value of all speculative investments is measured in terms of money. Whether one is speaking of real estate, valuable works of art that can readily be resold in the art market, or shares of a company’s stock, these things are generally bought and sold for money. However, there is an important difference between the prices of speculative investments and most other things that are purchased with money: whereas those who buy and sell speculative investments generally want their prices to keep going up, most people resist and complain about price increases in other things such as food, clothes, shoes, rent, electricity, oil, raw ingredients or commodities, airplane tickets, consumer products such as electronic devices and appliances, and so forth. Hence, although a consumer may buy a cheaper alternative brand if the price of the brand one usually buys, or wants to buy, goes up, it is not the case that a stock market investor will simply buy a cheaper stock if the price of the stock one wants to buy becomes too expensive. In this sense, the stock shares of different companies, and even those that are in the same industry, are not interchangeable in the way that products like bread, toothpaste, or running shoes are. This difference is due to the main reason why people buy these things: whereas most people buy and sell speculative investments primarily to make money, people buy other things in order to use them. Hence, there is a strong resistance to inflation in the case of commodities for use that does not exist in the case of commodities for speculation.[1]

Another important difference is that, in the case of common commodities for use, more of them can usually be produced, grown, harvested, or manufactured, whereas with commodities for speculation, their quantity is often strictly limited. In addition, whereas commodities for use are usually consumed fairly quickly and deteriorate with time, commodities for speculation are much more durable.

Money and speculative investments like stock shares have the property that, because they are invented things, every single unit is identical by definition to all the other units, and therefore it is assumed to have exactly the same value as every other unit of the same thing. However, there exists the important difference between them that, whereas speculative investments, with a few rare exceptions, can only be exchanged for money, money can be exchanged for a wide variety of commodities for use. This is because money is the universal intermediary of exchange in modern societies. If a person were to try to exchange one’s stock shares, bonds, or financial derivatives for a car, house, clothes, airline ticket, or groceries, one’s offer would more than likely be refused. One would be told to go and sell these financial instruments in the market and then return when one has converted them into money. As we have seen, at least in countries where governments behave in a fiscally responsible manner, such as by not printing large amounts of money to pay its debts or operating expenses, the resistance to price increases in the case of commodities for use stabilizes the value of money, a stability that does not exist in the case of commodities for speculation, whose prices can vary much more widely and rapidly than the prices of commodities for use.[2] These two divergent effects are in fact due to complementary aspects of the same human desire: the desire to save money when buying commodities for use, and the desire to make money when buying commodities for speculation.

Another important difference between the buying and selling of these two things is the fact that, in the case of a commodity for use like a hamburger or a pair of shoes, its price is determined individually, while the price of a commodity for speculation is determined collectively. What I mean by this is that, for example, if a store offers a discount on a particular commodity for use or raises its price due to a shortage in supply, then the price that consumers subsequently pay for it does not in any way influence the price of the same product that is sold at different times, such as in the past, or when it is not on sale. In terms of revenue and for tax purposes, every sale is registered individually, at the price it was sold; and the fact that another store sold the same product at a different price, or the same store sold it at different prices at different times, has no effect on the price that any other store sells it, except in the sense that, due to competition, it may motivate the store owner or manager to lower its price to make it match, or conform to, the other store’s price. In addition, every store tabulates its revenue based on its own particular sales, and not based on the sales of another similar store, even if it is of exactly the same kind or brand, such as the many stores of a chain of restaurants, grocery, cafe, pharmaceutical, department, or convenience stores.

However, this is not true of speculative investments such as stock shares, since all the participants in the stock market simply assume that the price at which a small portion of a company’s shares were sold recently is also the price of all the other shares of that particular stock, regardless of the actual prices that their owners paid for them. When some person, somewhere, is able to sell shares of a company’s stock for a higher price than another person paid for it, the latter simply assumes that one’s shares are automatically worth more, even though one hasn’t actually sold them. In other words, with some exceptions, in the real world outside the realm of speculative investments, people adhere to the model of individual pricing, whereas in the very peculiar world of speculative investments, people adhere to the model of collective pricing.

Perhaps a concrete example will help readers to understand the important pricing difference that I am describing. Let us suppose the price of a commodity for use such as gasoline is $3 per unit of volume, and that the price of a commodity for speculation such as a stock share was originally sold by the company to investors at $20 per share. This price, the issue price, is important because all the company’s shares were actually sold for money at that price. If the price of gasoline goes up to $3.50/unit, this does not change the prices at which all previous units of the same commodity were sold in the past. However, if the price of the stock goes up to $25/share, then all the owners of the stock, regardless of the actual price they paid for it, assume that their shares are also worth this most recent valuation of a usually very small percentage of the total shares of that stock. This collective delusion – for delusion it is, regardless of the number of people that believe in it – is concretized in the misleading term “market capitalization,” which many people believe accurately values the monetary worth of a particular company.

In Aesop’s fable about the dog with a bone, the dog sees a reflection of the bone in the water when it is crossing a bridge. Mistaking the reflection for a real bone, it lets go of the bone in its mouth, and loses what it already had in the vain effort to gain something that is not real. Many of those who engage in financial speculation behave like the dog in the fable: by seeking illusory speculative gains, they thereby risk losing the real wealth which they have, which is the money they began speculating with. Of course, the analogy is not exact, since there are many people who are able to make money, and for whom the reflected bone turns out to be real. (In their case, one could assume that there are a number of bones located beneath the water’s surface.) Another comparison can be made with celebrities, such as famous athletes, musicians, and actors, who are observed and admired by many millions of people. Among these observers, there are a significant number who believe that they too can become famous and successful like their idols. Similarly, in the stock market or other financial markets, there are many people who watch or hear about what some individuals are able to obtain for the same stock or other financial product which they own or want to purchase. All these observers assume that they too, like the individual who actually sold one’s shares for a certain price, will be able to obtain that price, or a higher price, when it comes their turn to sell their shares. But this belief is not always justified by future events, when they decide or are forced to take their financial wares to the market.

Real things, such as a house or a certain quantity of grain or oil, do not suddenly diminish or disappear in the manner that “market capitalization,” and speculative value in general, can diminish or disappear. In physics, there is something called the Law of the Conservation of Energy, which declares that the total amount of energy in a closed system remains constant, even though the energy can be converted from one form to another, whether mechanical, chemical, potential, gravitational, thermal, electrical, or nuclear. This process is roughly comparable to the fact that a given quantity of money can be converted into a wide variety of different financial assets, from stock shares to real estate to foreign currency to bonds to derivatives, and so on. However, there is no comparable economic Law of the Conservation of Market Capitalization, or the Law of the Conservation of Speculative Value, which very clearly demonstrates that the two things denoted by these terms are not real.

This difference in valuation between a commodity for use and a commodity for speculation is partly due to the fact that, so long as the company remains solvent and continues to operate, its stock shares are indestructible, since they can exist indefinitely without deterioration – unlike commodities for use, which deteriorate, go bad, break down, wear out, or become useless or obsolete with the passage of time. For example, a unit of gasoline is usually consumed fairly quickly after it is purchased, and hence disappears forever, although new units of gasoline can, of course, be produced in the future. If the revenue of a gas station were calculated in the same way as a company’s market capitalization, then its total revenue, including its past revenue, would fluctuate according to the latest price of gasoline, going up or down as the price of gasoline goes up or down. However, this is not at all the way that the revenues from the sale of commodities for use are calculated, since they adhere to the model of individual pricing.

Of course, if gasoline is treated like a commodity for speculation rather than a commodity for use, such as if a person or company, expecting a sharp increase in its price due to a gasoline shortage, were to buy a large amount of it, not to use, but to resell later when the price has gone up, then its value does increase, provided that one is able to sell the whole of one’s purchase at the higher price. This observation holds generally whenever a commodity for use, such as real estate, energy, raw materials, precious metals, fine wines, collectible objects like artworks, or jewels, are treated instead like commodities for speculation. However, there are often storage, insurance, shipping, or maintenance costs in the case of many commodities for use that do not exist in the case of commodities for speculation such as stock shares. But even in these cases there is a difference, for the gasoline is not recorded as revenue until it is actually sold. In contrast, in the real estate and stock market, most people simply assume that their residence, or stock shares, are worth what another similar or identical residence, or other shares of the same stock, was sold for, but without actually selling it.

It is precisely this different pricing model that accounts for much of the increase in profits that have been recorded in the financial sector in recent decades. Let us suppose that a mutual, hedge, pension, or other kind of investment fund owns 500,000 shares of a company’s stock, and that the fund purchased the shares at $40 per share. Hence, the fund paid $20 million to purchase the shares, usually with their investors’ money. This amount is a real cost, since money was actually paid to purchase the shares.[3] Then let us suppose that, at the end of the accounting year, shares of the same company are sold by someone else on a stock exchange for $60 per share. The fund manager then calculates the value of one’s shares as being worth $30 million, which represents an appreciation of $10 million, or 50%. Based on this speculative increase, the fund manager then pays oneself a bonus because of one’s superior “performance.” And yet, since the shares in the fund have not yet been sold for money, this increase in wealth is entirely illusory, since no one knows the price at which the manager will be able to sell the shares in the future: it could be the same or a higher price, but it could also be lower, and, in some cases, much lower than the price one paid for them. In other words, this bonus based on “performance” is not at all deserved, since the fund has not actually made any money on the shares it still owns. Even in real estate, which can also behave at times like a commodity for speculation, brokers are only paid commissions on properties that they are able to sell, that is, when money is exchanged for the property in question, and not on those properties which they own or have been commissioned to sell and whose price, based on “market” prices or valuations, is assumed to have gone up, but which have not yet been sold.

There is an important difference between selling a speculative commodity such as stock shares for a profit, and simply recording a profit on it due to an increase in its “market” price, which means the price that someone else recently received for that company’s shares. The first, although it is a speculative gain, is nevertheless a real speculative gain, since one has received an amount of money for the shares that is greater than the amount one paid for them. In contrast, the second is an illusory or uncertain speculative gain, since one has not actually received any money for the shares. When one purchased the speculative commodity, one had to pay money for it, which means that this is a real cost – or if one purchased it with borrowed money, then a real liability – that is not offset by a corresponding real revenue from having sold it at a higher price. This deceitful practice, which is called mark-to-market pricing, has become the generally accepted pricing model in the financial sector. It is the main reason why the “value” of primarily speculative commodities such as derivatives has ballooned to many times the value of the real economy in a very short period of time.

In the following excerpts, which are taken from books that were published within a span of less than twenty years, from 1995 to 2012, we can see the astonishing increase in the size of the derivatives market:

The derivatives contracts that are currently a hot topic in the financial press involve bets on movements of stock prices, currency prices, interest rates, and even entire stock market indices. Futures contracts on interest rates didn’t exist until the late 1970s. Now outstanding contracts on interest rates total more than half the gross national product of the United States. The total value of outstanding derivatives contracts was estimated to be about $12 trillion in mid-1994, with growth projected to $18 trillion by 1999.[4]

In 2006 the measured economic output of the entire world was around $47 trillion. The total market capitalization of the world’s stock markets was $51 trillion, 10 per cent larger. The total value of domestic and international bonds was $68 trillion, 50 per cent larger. The amount of derivatives outstanding was $473 trillion, more than ten times larger.[5]

Today [around 2012], there are 1,655 billion physical [US] dollars in existence, with some rough estimates of the world’s total physical currencies at over eight trillion [US] dollars.[6] On the other hand, the total value of the world’s derivatives is estimated at approximately $791 trillion.[7] That’s not only almost a hundred times the currencies, it is also about fourteen times the global GDP. Derivative instruments are by far the world’s largest pool of instruments of value. Few people understand them, they are not regulated in any meaningful way, and it is impossible to know what they are truly worth, not only because their value is contingent on future conditions but also because factors such as the risks associated with the counterparties of each instrument are utterly opaque.

Other than derivatives, the total value of securities in the world today includes approximately $82.2 trillion in worldwide debt securities and $36.6 trillion in equity value (the total value of all the world’s stock markets combined).[8]

So what exactly is going on? As we can see, the financial sector has been allowed to operate on a completely different pricing model, namely the fraudulent model of collective pricing, than the rest of the economy, which uses the model of individual pricing. This means that, in the financial sector, one can calculate, and record in one’s accounting books, a profit on a commodity that one owns but without actually having sold it. This is a crucial difference, for it means that the financial sector is allowed to record imaginary speculative increases in prices as if they were real, since it is only when a commodity, regardless of its nature, is sold that one actually receives money for it. It is this – and not the superior intelligence, acumen, industry, or foresight of those who work in the financial sector – that accounts for much of the increase in both the “revenue” and “profits” of this sector. This delusive accounting method has led to an important asymmetry in the paying of bonuses: when a financial executive or employee receives a large bonus based on illusory speculative gains, one is not obliged to pay that bonus back to the company when these illusory gains vanish because the “market” price has declined. In other words, one is rewarded when the “market” price goes up, but one is not punished in a corresponding manner when the “market” price goes down; and it is precisely because of this asymmetry that speculation and risk-taking have proliferated like a pestilential mania in recent decades in the financial sector.

When a financial company pays bonuses to its employees based on illusory speculative gains, they are in effect inventing large sums of money, since these illusory gains do not actually represent real revenue. This explains in large part why many financial companies and funds that deal primarily in speculative commodities and use the fraudulent mark-to-market pricing model often experience significant liquidity problems when the market goes down: because, for years and years, they have been paying out to their employees large monetary bonuses which they don’t actually have. Of course, this is a very dangerous and completely irresponsible way to operate a company and – as the portion of revenue and profits that are “earned” by the financial sector continue to increase vertiginously – an entire economy. For you are giving the participants in the financial sector a tremendous financial incentive to continue to inflate the prices of commodities for speculation by whatever means possible, including deception, fraud, market manipulation, and borrowing vast sums of money – a practice that increases the total risk in the industry, and thus makes a calamitous economic event more likely – in order to continue buying and selling them to make their prices keep rising as much and as quickly as possible.

Andy Kessler, a former Wall Street research analyst, noted: “Wall Street is just a compensation scheme…. They literally exist to pay out half their revenue as compensation. And that’s what gets them into trouble every so often—it’s just a game of generating revenue, because the players know they will get half of it back.”[9]

There are numerous historical examples of the bad things that can happen, both economic and social, when speculative “earnings” and “wealth” are mistaken for real earnings and wealth.

This difference between the prices of commodities for use and commodities for speculation also exists between the prices of speculative investments and wages, or the price of labour. Economists generally overlooking this difference by regarding income from speculation as being equivalent to income from wage labour – an oversight that can lead them, as well as those who rely on their mistaken analyses, to draw erroneous conclusions and make faulty recommendations, such as in government or tax policies. Wages have to be paid out on a regular basis, and hence, there is a stickiness to them that does not necessarily exist in the case of the prices of commodities for speculation, since, except when a company is being sold, it most certainly is not the case that when its stock price goes up, every single share of the company’s stock is exchanged for money at that price. In fact, in the vast majority of stock market transactions, only a very small percentage of the company’s total shares is actually exchanged for money at that price. In this regard, wages are like dividends, since dividends must also be paid out on a regular basis, which explains why they usually remain stable over time and do not fluctuate in the same rapid manner as stock prices, by undergoing speculative rises and falls in their valuation.

Because of the suggestion of slavery, there is no speculation in wages. For instance, no one buys and sells futures in wages. Even if a labourer wanted to, one would not be permitted to sell one’s future wages in exchange for a discounted present sum, with some sort of derivative as insurance in case the person loses one’s job or suffers injury and is not able to work.

Even winnings from gambling must be paid out when the game, race, or match is over, which distinguishes gambling from speculation, since speculation is a game that never ends, so long as the underlying commodity, whether it is real or financial, continues to exist. However, there is an important difference in people’s perceptions of gambling and financial speculation: whereas most people understand that gambling is a zero-sum game, since money is merely redistributed among the participants, while the house takes a percentage of the money that is gambled, many people suffer from the delusion that speculation actually creates wealth, due to the delusional model of collective pricing, when this is not at all the case. In other words, collective pricing, which is the way that things are priced in the illusory, smoke-and-mirrors world of modern finance, leads to the collective delusion that speculation is a wealth-creating activity, when in truth it only produces the illusion of vast wealth creation, while it allows the fortunate winners to amass more wealth – in extreme cases very considerably more wealth, measured in billions of dollars – than the losers. Just as gambling is heavily regulated and restricted in most countries, speculative financial activities must also be heavily regulated and restricted. In recent decades, we have seen the considerable harm that unbridled speculation in this sector can cause, both to the economy and to society in general, as the deregulation nonsense that is preached by free-market fanatics has gained greater and greater sway over those greedy, gullible, imitating, conforming, easily confused and misled, and frequently very stupid human beings, including those who hold positions of power or responsibility, as well as those who have an unjustified reputation for wisdom, sense, or understanding of how the economy works in general, and speculative markets in particular.

Real estate possesses characteristics of both commodities for use and commodities for speculation.[10] Although, unlike purely or primarily speculative commodities like derivatives and stock shares, all real estate, whether residential or commercial, is built ultimately to be used, it nevertheless shares a number of important characteristics with commodities for speculation. First, just like the total number of a company’s stock shares, the amount of land available in a populous urban area like Hong Kong, Tokyo, Moscow, London, Paris, or New York is fixed. Although, as cities grow, they expand outwards and upwards in cases where this is possible, the land on the periphery is clearly not as desirable as the land in or near the centre, and therefore it is usually much less expensive. Second, although real estate is not indestructible, it is certainly durable, since a building can exist for a long period of time, sometimes measured in centuries, provided it is maintained in good condition and repaired when it is damaged. Moreover, even if many buildings do not last such a long period of time, the land on which they are built exists for a much longer time, since cataclysmic geological events that destroy land are extremely rare when measured in terms of human longevity;[11] and even when buildings are destroyed by fire or a natural disaster, they are often rebuilt. Third, although real estate possesses more variation than the shares of a company’s stock, like stocks and other commodities for speculation, it too is priced collectively, with differences in size, quality, location, and so forth, being taken into consideration. Thus, when a house in a neighbourhood of comparable houses sells for a much higher price than the prices at which these houses were sold in the past, most people, both the owners and potential buyers, simply assume that the value of the other houses has also gone up, even though they may not have undergone any significant change to justify this price increase, such as in the size of the house or land. This peculiarity is due to our human perceptual system and our innate tendency to perceive similarities and categorize similar things together. In other words, the common practice of collective pricing is due entirely to our strong, innate imitative and conforming natures.

Because of these shared features, real estate can sometimes behave like a commodity for speculation rather than a commodity for use, with all the attendant problems and dangers that a high degree of speculation can cause. When there is a large amount of speculation in the real estate market, this can send the wrong signal to the market, thus leading to overdevelopment, or the construction of more units than are actually demanded by consumers and users. When the speculative boom ends and real estate prices plummet, a common result is houses or commercial properties that are either left unfinished or unoccupied, such as occurred following the recent speculative manias in Irish and Spanish real estate.[12]

In light of this important difference between the way that commodities for use and commodities for speculation are priced, I wish to introduce a simple mathematical figure that I will call the speculation ratio, which measures the ratio of the current stock price to its issue price. When a company issues shares of its stock, the price that is paid for the shares is money that the company, or its original owners,[13] actually receives from those who purchase the shares. Hence, this is true investment, in the economist’s sense of investment, since the company receives money from investors and can do various things with it, such as purchase manufacturing or transportation equipment, move into a larger building, advertise, develop new products, improve its production processes, expand operations such as in a foreign market, or hire more employees. However, all subsequent stock market transactions merely allow the stock owners to sell their shares to others, meaning that none of the money that is paid for the shares goes to the company.  Although no difference is generally made between what I have called primary and secondary stock sales, when viewed from the company’s perspective, there is very clearly an important difference between them.[14]

A figure like the speculation ratio is only useful if it tells us things that it is important to know. What, then, does the speculation ratio reveal? There are several general observations that we can make: (1) The higher the speculation ratio, the greater is the amount of speculation taking place, and hence, the greater is the share of the money supply that is tied up in this essentially unproductive financial activity. (2) Thus, a high speculation ratio can lead to inefficiencies in the real economy, such as large job cuts which may be needed to pay for the very high price that was paid to purchase a large corporation due to the inflated price of its stock. This explains why many corporations are bought with a combination of money and shares in the new or parent company, since there simply isn’t enough money to pay the inflated price of the company that is being bought. This in turn affects the manner in which the purchased company is operated, such as by drastically cutting costs, or primarily as a vehicle to maximize profits, while other forms of real investment may have difficulty accessing funds or have to pay a higher rate of return to access it. (3) A very high or rapidly increasing speculation ratio increases the likelihood of a calamitous economic event, such as occurred in Japan in the 1980s, Spain in 2007, Iceland in 2008, the United States in 2008, and during the dot-com bubble in the late 1990s. (4) Conversely, a low speculation ratio indicates that little speculation is taking place, which may mean that companies have difficulty accessing money via the stock market. In other words, there may be a lack of liquidity in the financial sector.

In the case of (3), it is important to note that this is only a rough relationship, for if one understands the essentially imprecise nature of economics, one will see that it is not possible to specify an exact figure, comparable to the Chandrasekhar limit for supernova explosions, beyond which the speculative bubble will burst. However, although there is no exact cut-off figure, there are clearly danger zones when governments should be concerned and consider intervening to prevent a potentially calamitous economic event, such as the sudden deflating of a stock or real-estate market bubble.

In his book, Capital in the Twenty-First Century, economist Thomas Piketty presents detailed data to support his thesis, which is the following:

If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high.

This fundamental inequality, which I will write as r > g (where r stands for the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value, and g stands for the rate of growth of the economy, that is, the annual increase in income or output), will play a crucial role in this book. In a sense, it sums up the overall logic of my conclusions.[15]

We are now in a position to understand why the rate of return on capital[16] can significantly exceed the overall growth rate, even over many decades: it is because of the different ways that these two things are priced, or measured – the fact that capital such as stock shares is priced collectively, while most other products and services that are produced, as well as wages, are priced individually. And collective pricing – the practice of valuing all the existent units of that commodity at the price at which a tiny percentage of that commodity was recently sold, regardless of the price at which the other units were actually purchased – allows for much more vertiginous increases – and decreases – in price than individual pricing.

Although I am not the person to test this statement, since I am not a practising economist, and neither do I have access to the pertinent data, I suspect there exists a rough correlation between the speculation ratio and the measures that Piketty uses to measure inequality, such as the difference between r and g. High levels of r are due to more money being funnelled into the financial market. As the prices of financial instruments increase, then so too does the speculation ratio. Hence, one would expect to find a correlation between the speculation ratio and (rg).[17] Since it is the real economy that creates wealth, when the speculation ratio is high, or when there is a large gap between r and g, this means there is a lot of speculation taking place, which can pose a danger to the stability and continued growth of the real economy.

There are many people, both within and without the financial industry, who regard all forms of financial speculation as being beneficial, and thus, in their view, these activities should not in any way be curbed, restricted, or regulated, except in cases of outright fraud. But these people, who should know better than to utter such obviously false statements, have made some pretty basic mistakes. Even though the value of all financial instruments is measured in terms of money, they are not equivalent to money, since they cannot be used to purchase the many different things that can be purchased with money. If one considers money as a means of allowing people to obtain the things they need and want in order to live their lives, then clearly financial instruments are a further step removed from enabling people to do this. Although real wealth consists of things – houses, cars, clothes, furniture, planes, medicines, jewellery, electronic gadgets, appliances, and so forth – as well as activities that people want to perform that make life worth living, such as vacations, attending performances and concerts, going to a doctor when one is sick, receiving education or instruction, hiring a lawyer, etc., those who possess large amounts of money can clearly obtain more of these things than others. As financial instruments have become increasingly prominent in the global marketplace, and because many people make the mistake of equating them with money, those who control them are ultimately able to control greater amounts of wealth. Those who are skilled in making money from the buying and selling of financial instruments do not, in general, actually contribute to increasing total wealth; instead, what they are doing is furiously jousting with others in the attempt to gain and control as much as possible of the wealth that is created by the other sectors of the economy.

The rapid increase in speculative financial investments in recent decades is due to the anemic rate of growth of alternative, more traditional investments, as well as investors’ impatience, and hence, their desire for quick returns. This dramatic change in investors’ behaviour has had significant effects on the real – as opposed to the speculative – economy, such as the way that corporations are managed and operated.

The cause of all speculative bubbles is mistaking speculative growth for real growth, or believing that speculative growth creates new wealth, which it does not. This is comparable to believing that a loaf of bread that, during the bread-making process, increases four times in volume also becomes four times more nutritious.[18] If we continue this analogy, the flour from which the bread is made is produced by the real economy, and not by the speculative economy, which the financial sector in some industrialized countries is increasingly becoming due to the very foolish practice of deregulation in that sector, notably in the United States.

A sound real economy, meaning one that is stable, with a relatively low level of unemployment, and is able to produce a variety of products and services, can support a degree of speculative activities, whether in financial or real estate markets, just as it can also support a degree of black market or underground activities, meaning those that are not reported to the government, and hence, on which no taxes are paid.[19] However, there is a limit to the amount of speculation it can support without floundering, or undergoing rapid contraction because of excessive speculative activities. These sudden declines are generally unpredictable in their exact timing, although there are always warning signs prior to their advent. Of course, these warning signs are not always heeded by speculators, banks, or government officials. A case in point is Japan in the 1980s, when the majority of the Japanese population, including those who occupied prominent government and business positions, believed that the country’s steadily rising real estate and stock prices actually meant that the country was becoming many times more wealthy than it was prior to these speculative price rises. That this inflated speculative wealth was only a mirage was shown when the real estate and stock bubbles burst, with prices falling far below their peak levels.

Between 1956 and 1986, land prices increased 5,000 percent [or by fifty times], while consumer prices merely doubled. During this period, in only one year (1974) did land prices decline. Acting on the belief that land prices would never fall again, Japanese banks provided loans against the collateral of land rather than cash flows. Towards the end of the 1980s, they increased lending against property, especially to smaller companies. The rising value of land became the engine for the creation of credit in the whole economy.


By 1990, the total Japanese property market was valued at over ¥2,000 trillion, or four times the real estate value of the entire United States. The grounds of the Imperial Palace in Tokyo were estimated to be worth more than the entire real estate value of California (or Canada, if you preferred).[20]

Speculation, especially when it is transacted with borrowed funds, poses a drag on the economy, while it gives people the false impression that the economy is growing at a higher rate than it actually is. Furthermore, when the speculation ratio is high, or when r exceeds g by a large amount, there exists the possibility of a calamitous economic event which, unless it is prevented or mitigated, can cause a severe contraction in economic output, with an accompanying increase in unemployment.

This leads to the recognition that the naive economic declaration that savings equals investment is highly misleading, for not all kinds of “investment” are created equally, since they have different effects on the economy, on people’s behaviour, and on social outcomes. In other words, while some kinds of investment should be allowed and encouraged, other kinds should be restrained, discouraged, or strictly prohibited. It is most certainly not true that all kinds of growth are good, or that anything that increases in price or monetary value represents real economic growth and therefore should be permitted.

The economists’ truly astonishing failure to distinguish speculative from real investment has led to the grotesque situation where, because they are treated as if they were the same, huge sums of money are being funnelled into financial markets around the world, in the hope of acquiring large speculative gains, on which frequently little or no taxes are paid. This situation is comparable to a government that takes no measures whatsoever to prevent currency counterfeiting, based on the belief that this is a productive activity that increases people’s real wealth, since it increases the total amount of money in existence, and thereby allows its currency to become debased to a considerable extent.

In light of this discussion, I wish to make some policy recommendations. First, it is important to distinguish between primary and secondary sales of stock shares. Because only the first constitutes true investment that delivers funds to companies, the sale of these shares by their purchasers should be taxed differently from all subsequent sales of a company’s shares. A low tax rate on speculative gains made on the primary sale of stock shares will encourage investment, while a higher tax rate on secondary sales will discourage speculation. Moreover, this should also prevent, or at least make less likely, the likelihood of a calamitous economic event, as well as the recent widespread phenomenon of overpriced corporations whose owners or management then proceed to cut jobs while focusing primarily on maximizing short-term profits, with all the societal and economic problems that result from this harmful model of corporate behaviour. A high tax rate on the speculative gains made from secondary stock sales will also reduce the incentive for stock manipulation.

Second, tight regulation must be reintroduced in the financial sector, with new financial instruments having to be approved by a governmental regulatory agency before they can be bought and sold, just as in the case of new foods, drugs, buildings, and consumer products. Many of the new “exotic” financial instruments that have proliferated in recent decades, primarily as a result of their uncritical and extremely foolish introduction and proliferation in the United States, due to the deregulation dementia that abounds there, should never have been allowed on the market. They are the financial equivalent of deadly or dangerous drugs, shoddy merchandise, poorly-designed cars and planes that are more likely to crash or explode, and structurally-unsound buildings. Deregulating the financial sector is like permitting drug companies to sell every single new drug on the market without any prior testing to see what effect it has on people, based on the belief that “There is no such thing as a bad drug, only ill-informed users.” Similarly, the mantra that is repeated by those who work in the deregulated financial sector in the United States is “There is no such thing as a bad financial product, only ill-informed buyers.”

The argument that innovation in the financial sector should be both allowed and encouraged, just like in other sectors of the economy, is spurious. In the first place, many of these new financial speculative inventions are complex, and often it is not possible to foresee what effects they will have until, in many cases, it is too late to do anything to limit their harmful effects. Second, many individuals and companies who speculate rely too much on mathematical equations like the Scholes-Merton model of valuing derivatives, which gives them an unjustified confidence in the supposedly real value of the things they buy and sell. Contrary to what many of these naive investors believe, the value of these things is whatever someone else is willing to pay for them, and clearly this amount can vary from time to time, including instances when there is no one who is willing to buy the things one wants or needs to sell. These are the “black swan” events that their equations and supposedly fail-proof algorithms fail to predict, with potentially catastrophic results. Third, much of this speculation is done with other people’s money, which is, as most people know, not the best way to make someone behave in a responsible manner. What has happened in the financial sector is comparable to allowing doctors to operate on patients’ bodies, thereby earning significant operating fees, but without their patients’ knowledge or approval.[21] When large quantities of people’s savings disappear due to excessive or ill-advised speculation, this can cause a panic that ripples through the greater economy, thereby causing an economic recession or depression.

Third, governments around the world must take steps to limit, discourage, and, where necessarily, criminalize excessive speculation. Although it is sometimes difficult to distinguish speculative buying and selling from legitimate buying and selling, this is no reason for not seeking to limit the harm that is caused by this highly pernicious activity. Speculation is the modern-day equivalent of piracy and banditry – which, besides taking from others the riches which the robbers didn’t produce, also sowed fear among the general populace – except that these modern-day pirates do not use weapons to threaten their victims, and they are dressed in expensive suits and possess all the other appurtenances that money can buy, which deludes many people into believing that their activities are not criminal. The difficulty that most people have in seeing the criminal nature of their activities is because the link between their activities and their victims is far more distant and opaque than it is in the case of piracy and banditry, where the link is immediate and obvious.

The mistaken belief that speculative financial activities create wealth, and therefore they should not be discouraged or impeded in any way, is one of the primary reasons why those who work in the real economy are earning less and less, or see no rise in their real income, while those who work in the financial sector are earning more and more. For the truth is that those who work in the financial sector are merely expropriating for themselves as much as possible of the wealth that is created by the real economy, thus leaving less and less for those who actually create this wealth. This is because the value of the money in any country is determined by the real things – food, buildings, cars, clothes, computers, as well as services – that its people produce or provide. This is clearly shown by the fact that, in an economy that consisted only of the financial sector with no real economy, the people would have no food to eat, no clothes to wear, no houses to live in, no cars in which to get around, no buses, subways, or trains to ride, no theatres or restaurants to go to, no books or magazines to read, no television programs, concerts, or sporting events to watch, no music to listen to, no electricity to power their many devices and brighten the dark nights, no sewage and garbage collection to remove their wastes, no teachers to educate their children, no police officers to protect them, no barbers or hairstylists to cut their hair, no pilots to fly their planes, no delivery people to deliver their purchases, and no doctors to cure them when they are sick. Although they would have numerous financial advisors, agents, and intermediaries to tell them what to do with their money and how they can make even more of it, their money would be completely worthless, since they could not actually buy anything with it other than more financial services.

Fourth, as I have argued elsewhere,[22] the widespread practice of rewarding corporate executives with stock shares or options should be strictly prohibited. They should only receive a salary, with monetary bonuses for performance; and even in the case of these bonuses, it may be found necessary to limit them to a certain percentage of their salary, otherwise competition, imitation, and conformity will lead to exorbitant bonuses being paid to some executives. This decoupling of executive monetary incentives from the company’s stock price is necessary to deter the present widespread practice of operating corporations primarily as speculative ventures that aim to maximize short-term profit, rather than as long-term businesses that seek to provide good products or services for their customers, pay their employees a decent wage, and respect all the laws of the country or countries in which they operate. In other words, the aim of this recommendation is to reduce, as much as possible, the speculative element in the day-to-day operations of corporations, for this influence has many harmful economic and social consequences. It is a very serious mistake, with potentially disastrous consequences, to allow the stock market, or the dizzying, volatile, and mania-inducing miasma of speculation, to influence or determine the manner in which corporations are operated.

Coupled with this recommendation is the need to prohibit bonuses based on illusory speculative gains. In other words, a company or fund cannot record a gain or profit on a speculative commodity that it owns until it has actually sold the commodity for money.[23] Hence, in reporting their quarterly or annual results, companies will have to distinguish real speculative gains from illusory or expected speculative gains, which means distinguishing between those commodities which they have sold and those which they still own, with bonuses being paid only on the former. In all other industries except the financial industry, you cannot record as revenue any stock that remains unsold. The portion of a company’s product that has been paid for but not yet sold is recorded as inventory. The same basic accounting rule should also apply in the financial sector, with all unsold financial products categorized as financial inventory.

Fifth, the widespread practice of lowering interest rates in the belief that this contributes to sustainable economic growth should be reconsidered, since a large portion of these low-interest loans is being used by wealthy individuals, hedge funds, banks, companies, and other organizations to speculate in financial and real estate markets – that is, to see which of them can selfishly obtain as much of the wealth that is created by the real economy as possible – rather than helping the real economy to grow. Active monetary policy in the form of low interest rates is a double-edged sword, for although it may lead to more investment in the classical economic sense, it also leads to practices and outcomes that reduce the total number of jobs.[24] This is an example of one hand taking away what the other hand gives or produces. Moreover, abnormally low interest rates force people to invest their savings in more risky products because traditional bank deposits pay very little interest. And when this strategy is carried to the extreme of zero interest, there is nowhere for interest rates to go but up. Low interest rates, or easy money, can also lead to dangerously high levels of speculation based on greater and greater leverage, which in turn makes more likely a calamitous economic event.[25]

It is essential that people, whether they work in the financial sector or not, and especially those who decide government policy and legislation, understand the important fact that the financial sector does not create wealth, even if many financial companies are able to earn large profits. One must not allow oneself to be deluded by the euphoric mania that grips many people when they see the rapid rises in the prices of speculative commodities, believing that these price increases can continue forever, since these increases are due to the peculiar pricing model – the highly misleading model of collective pricing – that is employed in valuing speculative commodities but not in valuing other commodities. The confounding of speculative gains with real gains has led to the greatest financial swindle in the history of humanity, measured in hundreds of billions, and perhaps trillions, of dollars. The speculative mania begotten by collective pricing is the treacherous shoal on which every single speculative bubble in history has eventually foundered and burst.

The role of those who work in the financial sector can be likened to the role of a midwife at the birth of a child: the midwife has not conceived the child or brought the pregnancy safely to term, and neither is she responsible for the child’s later nourishment, protection, education, and development; rather, she assists in making sure that a critical stage in the child’s life – its birth – transpires without any mishaps, which could kill or cripple the child and render its later development less successful. Similarly, those who work in the financial sector should regard themselves as financial intermediaries, or midwives, who help transform savings into productive investments, as well as providing other useful services.[26] When finance performs its role of midwife to the economy, it serves as the broker, middleman, or intermediary between those who have money and those who want or need money, and are therefore willing to pay a price to borrow it. But when finance exceeds this important function and comes to believe that it creates the wealth that, in reality, it only helps to bring into existence, then it becomes a cancer or parasite on the body economic, while debilitating and, in extreme cases, potentially destroying it. It is when those who work in the financial sector vainly and pompously believe that they actually create wealth,[27] and therefore they deserve to receive a significant part of this illusory wealth, that speculation can become dangerous, and thus must be restricted, restrained, reduced, and regulated by the government.

[1] Since economists are over-fond of making generalizations, it is important to realize that this statement is not true in all situations, places, and times. Like many other economic discussions, this discussion is primarily valid only for the particular conditions and behaviours that are dominant in many societies at the present time – in other words, the particular models of behaviour that are practised by the inhabitants in those places. If these models of behaviour were to change, then the validity, or applicability, of this discussion would also diminish or disappear.

[2] When the prices of commodities for use vary in the same large and unpredictable manner as commodities for speculation, this can cause people to become frightened and uncertain, which can cause economic problems or crises of varying duration and severity.

[3] If the shares were purchased with borrowed money, then this is a real liability which it owes to the financial company that lent it the money to purchase the shares.

[4] When Corporations Rule the World by David C. Korten, p. 188. Kumarian Press, Bloomfield, Connecticut, 2001.

[5] The Ascent of Money: A Financial History of the World by Niall Ferguson, Introduction. Penguin, New York, 2008.

[6] The author’s estimate is different from the total money supply, which is much larger than this figure, since he is speaking of actual paper or metal currency, which increasingly is being replaced by electronic money, such as in bank accounts.

[7] Of course, these derivatives are not actually worth this enormous amount of money, since there is nowhere near that much money in the world. In other words, if all the owners of these derivatives were to try to convert them into money, their prices would drop to zero or to a level only slightly above zero. This is nothing more than a collective delusion that is supported, at least temporarily, by the collective faith of all the many participants in these speculative markets. The numerous greedy and opportunistic – but in reality deluded – participants in the financial sector have huffed and puffed the derivatives balloon until it has swelled to truly astonishing proportions, dwarfing by many times the size of the real economy. By failing to regulate these highly speculative financial products, the U.S. government has given the financial institutions that issue them the license to create from nothing a kind of liability that increases rather than reduces the total risk in this sector.

There is a similarity between the risk created by the unchecked proliferation of derivatives and quantum uncertainty, which states that, by the very act of measurement, you are changing the value of the thing which you are trying to measure. By creating new supposedly risk-reducing products, this automatically changes the risk that one is trying to measure and believes one has accurately quantified, since derivatives are a kind of financial liability. Hence, by its very existence, the new financial product changes the risk involved. However, this is not the primary source of risk related to trading derivatives, which is due to the false belief that it is possible to calculate their value objectively. Many people who work in the financial sector make the mistake of believing that they can measure risk precisely, just as if risk were a precisely quantifiable quantity of a given situation, just like an object’s mass, velocity, volume, or temperature.

The widespread reliance on the fallacious Black-Scholes-Merton method of valuing derivatives has probably contributed significantly to the preposterous inflation in the total “value” of derivatives, since it has given investors the false assurance that these derivatives have an intrinsic value that is independent of the market. All these credulous fools have forgotten the basic truth that applies to all speculative markets, namely that a speculative commodity is only worth what someone else is willing and able to pay for it, since it can happen, as the world witnessed during the financial crisis of 2008, that the issuers of these derivatives are not able to pay the promised sum when the stipulated event occurs, in which case they become worthless. There are times when there are no buyers for a speculative commodity, in which case its price can drop precipitately in a short period of time, because there is no one who is willing or able to buy it, that is, exchange it for money, or at least not at the high price at which it was formerly bought by its most recent possessor. This is more likely when the sellers must sell at any price because they bought the commodity with borrowed money, so great was their faith that its price would continue to go up, which the lenders are now demanding be repaid.

Scholes and Merton – but not Black, since he was dead – were awarded the Nobel Memorial Prize in Economics for their mathematical formula in 1997. As we can see from the three excerpts, there was a significant change in the total “value” of all outstanding derivatives before and after the extremely foolish decision to award them the Nobel Prize for their work. Many people’s simplistic reasoning was that, since they were awarded a NOBEL PRIZE for their work, this means that the formula must be correct. Hence, this prize legitimated something that is wrong, which greatly magnified the imaginary wealth and confidence in risky investments that were built upon this erroneous equation.

[8] Power, Inc.: The Epic Rivalry Between Big Business and Government—and the Reckoning That Lies Ahead by David Rothkopf, chapter 8. Viking, New York, 2012.

[9] Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das, chapter 20. FT Press, 2011.

[10] However, an important difference is that it is impossible to short-sell a property, since no property owner will let you borrow one’s property and try to sell it at a lower price. Hence, when speculation occurs in the real estate market, prices can only go one way, namely, up. Once prices start to go up, there is strong pressure for this trend to continue, since pretty nearly all the participants – from the property owners to the buyers, the banks that lend the latter money, real estate brokers, and construction companies and workers – all want, and in some cases need, real estate prices to keep going up in order to recoup or repay the large amounts of money which they have invested, loaned, or borrowed.

[11] Of course, the destruction of land in coastal areas, along with the properties that are built on them, does occur from time to time.

[12] It is common for people living in countries with little financial experience to mistake speculative for real growth that will continue indefinitely, as occurred in Ireland, Spain, and Iceland in recent decades. However, recent events in the United States, which is a mature financial country, show that even those with a long history of financial experience, at least when viewed collectively, since younger workers and investors or speculators may not have personally experienced the harm that can result from speculative bubbles, are susceptible to this common form of collective mania.

[13] An increasingly common practice when stock prices rise to very high levels is for company owners or founders to delay issuing stock until the company is profitable, so they can cash in on its success and become fabulously rich. In these instances, the stock market is not being used as a means of accessing financial capital in order to help the company to grow, since these funds are acquired in other ways, without necessarily giving up a share of ownership in the company, or at least not a large part of it. This recent phenomenon could be summarized by rechristening the “IPO” as standing for “Immense Profit Opportunity.”

[14] In the case of real estate, a comparable ratio for each building would be to compare its current “market” price to its building or construction cost, since this, like the issue price of a stock, is a fixed price that doesn’t vary with time, in the sense that, although material and labour costs can change with time, the construction cost of a particular building does not change in accordance with these changing costs.

[15] Capital in the Twenty-First Century by Thomas Piketty, p. 25. Translated by Arthur Goldhammer. Harvard University Press, Cambridge, Massachusetts, 2014.

[16] Piketty’s definition of capital is the traditional economic definition. However, my concern is with those forms of capital that are priced collectively, which does not apply to all the forms of capital that he includes in this term, such as rents, dividends, interest, and most corporate profits outside the financial sector.

[17] In calculating the overall speculation ratio, one must include companies that go bankrupt, and not only those whose stock price is measured by a general measure like the S&P 500, since these include only companies that have survived the high mortality rate of new businesses. One must also weight companies based on the amount of money they were able to raise by issuing shares of their stock, since, for example, a company that is able to raise $500,000 should not be weighted equally as a company that is able to raise many times this amount.

[18] In general, cooked foods provide more calories than raw foods because cooking renders many foods easier to digest, which is comparable to the greater liquidity that a mild degree of speculation can provide. However, there is a limit to the additional nutrition, in terms of calories, that cooking provides, since cooking also destroys some vitamins. This is comparable to the fact that, while some speculation can be beneficial to the economy, an excessive amount of it can be harmful, just as food that is overcooked, or burned, is neither palatable nor nutritious, and can be carcinogenic.

The oft-repeated argument that speculators benefit the economy by providing liquidity is fallacious because there is no speculator in the world who seeks to lose money, at least not intentionally. Hence, during abnormal times, such as when there is a precipitous decline in the stock market, speculators will behave like everyone else, by selling rather than buying, which will worsen the decline. It is only national institutions such as central banks that will step in, often at a considerable financial loss, to prevent such calamities from causing a panic and spreading throughout the economy. Hence, speculators, like many a fickle, flighty, fair-weather friend, disappear at precisely those moments when they are most needed.

[19] A healthy economy can also support a certain degree of indebtedness, both in the case of consumers, businesses, and governments. But too much indebtedness can cause a crash or decline in the economy. In a sense, lending to consumers or businesses is also a form of speculation, since one is assuming that they will be able to pay back the amount loaned with interest, which depends on a number of other factors such as that the consumer will continue to earn enough income to pay back one’s debts or the business will prosper, the economy will not shrink, interest rates will remain low, there will not be a natural disaster, the soil will remain fertile, the Sun will continue to shine, and so forth.

[20] Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor, pp. 293 and 301. Plume, New York, 1999.

[21] In making this analogy, I am referring particularly to the repeal of the Glass-Steagall Act, which separated commercial from investment, or speculative, banking, thus allowing bankers and others to speculate with their depositors’ savings, while earning significant fees and bonuses by doing so.

[22] See “The Separation of Corporate Interests.”

[23] I fully understand the great resistance to, and difficulty of, enforcing this recommendation on those who work in the financial sector, since it will mean large reductions in their annual bonuses. However, it is the only way to bring about a measure of sanity – in contrast to the present insanity that abounds – in this sector.

[24] Perennially – and abnormally – low interest rates also lead to a large increase in total indebtedness, whether personal, corporate, or governmental, as is evident in many countries today.

[25] The policy of U.S. Federal Reserve Chairman Alan Greenspan of aggressively reducing interest rates whenever there was a sudden decline in the stock or real estate market merely postponed the inevitable day of reckoning, while it increased the possibility that the subsequent contraction would be even more severe or calamitous. This is because the speculators who had collectively raised prices to unsustainable levels were not taught a lesson – by losing significant sums of money – that would have dampened their enthusiasm, thus making them more cautious and hesitant in their speculative activities in the future. This chastening effect was visible in the decades following the Stock Market Crash of 1929 and the Great Depression, when the memory of this calamitous financial and economic event dampened speculative fever in the financial sector. But instead, during Alan Greenspan’s tenure as chairman, they were taught the unwise lesson that the U.S. government would always bail them out whenever their reckless activities led to a steep decline in the prices of speculative commodities like stocks, derivatives, and real estate.

In addition, Greenspan’s ideologically-motivated opposition to any form of regulation or government oversight also contributed to the financial debacle of 2008. Although technically he was not part of the executive or legislative branches of the U.S. government, and was supposed to remain independent of them, clearly his considerable prestige and influence during his tenure as Federal Reserve Chairman gave him significant influence on government policies. The financial licentiousness of the Greenspan years is comparable to a Roman orgy, or to sexually permissive individuals who infect others with a variety of sexually transmitted diseases as a result of their recklessness and lack of caution, while they seek only to maximize their own selfish pleasure.

In my opinion, Alan Greenspan will be remembered as the Neville Chamberlain of modern finance. Prior to the start of World War Two, Chamberlain, who was the prime minister of Great Britain from 1937 until 1940, when he was replaced by Churchill, went to Germany in September 1938 and met with Hitler on three occasions. His efforts to prevent war, by submitting to Hitler’s demand that a part of Czechoslovakia be ceded to Germany, were later condemned as cowardly “appeasement.” However, the fact, which is obscured by some historical accounts, is that his views coincided with those of the great majority of Britons at the time, who still remembered the heavy human cost of the Great War, which had ended only twenty years earlier. Being the leader of a democratic nation, he was fulfilling his role as the people’s elected representative by doing what the majority of his fellow Britons wanted him to do, which was to avoid war at all costs. It was only later, when it became clear that Hitler’s assurances were insincere and that he was determined to start a continental war no matter what the leaders of other countries did, that Chamberlain’s popularity began to decline, and his reputation suffered an irreversible alteration. Similarly, most Americans enthusiastically supported Greenspan’s decisions and monetary policies during his lengthy tenure as head of the U.S. Federal Reserve. And just as Chamberlain returned from his final meeting with Hitler with the confident but erroneous declaration that he had secured a “peace with honour” and “peace in our time”, it could be said of Greenspan that he deluded the American people into believing that he had enabled them to acquire “wealth with honour” and “wealth in our time,” which declarations were later proven to be wrong, since this wealth was no more enduring or honorable than the temporary peace that was achieved by Chamberlain.

[26] Until fairly recently, this is how bank managers and others who worked in the financial sector behaved. When they had a close, personal relationship with those who entrusted their savings to them, they were more aware of their fiduciary responsibility to those persons, and therefore they were much less likely to invest their depositors’ savings in risky financial products. Just as the decoupling, along with the increased distance, between consumers and the producers of the products they consume can have many harmful consequences, the decoupling and increased distance between those who work in the financial sector and those whose money they are investing or speculating with has also resulted in many harmful consequences, such as by encouraging selfish and reckless behaviour.

[27] This is comparable to a midwife who believes that she has also conceived the child she is delivering, and so demands a much higher fee for her services.