Irreverent Economics

Angela Merkel is focusing her anger on the evils of speculations. Alas, its a strawman, but what is the role of speculators?

In some cases speculation is stabilizing. If the speculators trust the fundamentals and the government, they will keep asset values at the preferred level. An example is during the gold standard.

In other cases, speculators destabilize. Lets consider one case from Germany’s history. From 1921 to 1924 they had hyperinflation. Leaving the original causes aside, the speculators helped fueling it. They didn’t cause it, but made it hard to conquer. The only way the Reichsbank ended the hyperinflation was by beating the speculators. How? They cornered the market. More on that later.

The speculators did not cause this crisis. Governments did. Those who pushed politics over economics. And as usually happens in such cases, economics won.

Another leader who spurned economics was Ayatollah Khomeini who said

economics is for donkeys

Of course his country usually is in the top 10 list amongst the countries with the highest inflation. With high deficits, and overall lousy economic performance.

Hope the EU leaders take economics more seriously. Addressing the real problems and not the speculators would be a start.

This entry was posted on Friday, May 21st, 2010 at 6:00 am and is filed under RiskResearch. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.