From: Jim Devine I'd define speculation as the opposite of hedging. Hedgers try to minimize risk by (in effect) buying insurance. A farmer hedges by "locking in" the price of some of her cop in the spring because she doesn't know what the price will be in the fall.
A speculator, on the other hand, wants to take on risk to earn a high return. This can involve leveraging (buying assets using a lot of borrowed money), which increases the return (after interest). Another take on speculation comes from Minsky, who defines speculative finance as taking on debts to invest in projects or assets that cover only the interest payments on the debt, so that the speculator doesn't pay down the debt by paying any principal. This differs from hedge finance, in which income flows are expected to meet financial obligations (both interest and principal) in every period. It also differs from Ponzi or Madoff finance, in which income flows won’t even cover interest cost, so the firm must borrow more or sell off assets simply to service its debt. The hopes is that the value of the speculative assets purchased will rise enough to allow payment of interest and principal. In general, a speculator takes a big risk in hopes of making a big "killing." ^^^^^^^ CB: I agree that your definition of speculation is the conventional one. What I can't understand is if we look at all the big speculators, alleged big risk takers, together, then by the definition of risk, most of them should suffer losses. As a group they should suffer net losses. Most of them should fail to make a big killing by the definition of risk, i.e. that a risk involves a high probability of loss, or a higher probability of loss than gain, no ? Most of the group that take big risks should suffer loss, from what I understand by the definition of "risk". So , "risk" must be being used in the opposite way of its normal meaning. They are taking "anti-risks". Even with the hedgers, shouldn't their "insurers" suffer net losses ? In general , who does all this risk get passed off to ? Is there a pool of failed speculators and hedgers ( or insurers) that is larger than the successful, fabulously rich ones that we hear of ? Also, for there to be a big concentration of wealth in somebody, there has to be a big loss of wealth by somebody else. In that case , of course, the candidate for the "losers" is the great mass of people, from whom surplus value is exploited and squeezed. This is the sort of basic logic that bourgeois economics and finance can't get around with all its complex math and "theories". For there to be big winners there must be big losers. Overall it must be a zero sum "game". Also, how does all that activity sitting at desks and computers on Wall Street actually _create_ wealth. for which the Wall Street bureaucrats are so handsomely compensated ? Answer : It doesn't. No matter how complex the math, it can't demonstrate that those activities do create so much wealth. How does "speculating", putting some money at "risk", create new wealth for which the "speculator" is appropriately rewarded ? ( Leaving aside the question of do most successful "speculators" really take big risks or do they involve themselves in "sure things" ?) _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
