Monday, July 10, 2006

Investment Insanity

Today’s money market speculators make the moneychangers of old look like righteous citizens. The same can be said for other speculators, as well, including energy traders and those who dabble in real estate, stock markets, commodities, and precious metals. Speculation, a primary driver of inflation, guarantees that everyone ends up paying more for everything.

When markets shift from favoring buyers (low demand = low prices) to favoring sellers (high demand = high prices), speculators smell opportunity. Their rush to cash in introduces a false dynamic into the marketplace, distorting something’s value out of all proportion to what it’s actually worth.

Throughout the 1970’s, Nelson Bunker Hunt and his brother bought up vast quantities of silver, eventually cornering the silver market. Their actions drove silver prices from less than $5 an ounce to over $54 an ounce before the market collapsed in March of 1980, sending prices plummeting into the $10 range. The Hunts lost money (proving that even the greediest speculators sometimes fail), as did many other speculators, but there were some winners, too.

The lessons to be learned, here, are that speculating is risky business, and that for every winner there must be one or more losers. Winning is a relative term having approximately the same relationship to losing as hot has to cold.

The problem with speculating is that it creates nothing, adds nothing to the economy. It doesn’t create wealth, it only manipulates wealth by taking money out of one pocket and putting it into another. It’s a game rich people play in order to take money away from people who merely aspire to be rich.

The Savings & Loan scandal of the ‘80’s, the Enron energy scandal of the ‘90’s, and the dotcom bust on the Millennium threshold all came about because people played fast and loose with their ethics. But then, greed always trumps good sense, doesn’t it?

Now, there’s another market crisis looming on the horizon. For twenty years real estate values have responded to market forces in the same way that gasoline responds to an open flame. Eventually, though, there’ll be a market correction, and the real estate inferno will burn itself out.

I think that day is closer at hand than anyone wants to admit.