No Such Thing As Socially Harmful Financial Market Speculation (TDE,Joakim Book) \ stacker news ~econ

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No Such Thing As Socially Harmful Financial Market Speculation (TDE,Joakim Book)

6398 sats \ 9 comments \ @denlillaapan 27 Jan econ

@Undisciplined kindly volunteered me to explain the virtues of financial markets for Stackers (#866802). It's a tough job, but someone's gotta do it. And since it's his mensiversary of running ~econ I felt I should support the cause by posting here.

As for the job requirements, Luckily, I have, you know, ~500 popular articles of practice (not all on finance, lol) and a few credentialist academic degrees to my name (#847595). All this is to say that I have thought about what money does and how financial markets serve society for longer than most of y'alls have been Bitcoiners. (Doesn't mean I'm right, but you know it's something to consider!)

I wanna share two things. First, my end-of-year Bitcoin Magazine piece ("How Bubbles, Price And COVID-19 Changed Bitcoin for Me") from 2021 where, I think, I best laid out the efficient market hypothesis (EMH) for a bitcoin crowd. It's pretty lengthy, but the bitcoin/markets portion is well worth a read even today. Here are the relevant bits:

Prices Know Something You Don’t At the base of economics lies an information and calculation argument: real market prices, emerging in trade between willing participants, generate information about the world. It allows us to calculate profits and losses, to see if what we make is worth more than what we put in. It allows market participants (i.e., all of us) to grasp what’s going on Financial markets and assets do the same thing for society’s current and future allocation of savings. The prices of securities vary more than market prices because the (far-off) future and how to assess it is less knowable than the immediate present or recent past. The “trouble with bubbles” is that nobody knows the future.

"Asset prices incorporate the knowledge that exists about the present and forecasts the future in the best way that we know how. If owners of securities are wrong about that future, they lose money or miss out on profitable investments."

That last bit is the crucial core component of Eugene Fama's brainchild (#863751): current prices of assets are the best guesses we have about the future. They're not ultimate truth; they're not always "right" (whatever that means) or validated by the future path world history takes; they're not necessarily "rational" (again: wth, dictionary man?!). All it captures is that the sum total of humanity's knowledge, as acted upon through ownership and the establishment of prices. (Maybe you don't like it, or maybe you can't fathom what others are doing, but that's largely beside the point when all of humanity's combined info is condensed and concentrated.)

Second, "There’s No Such Thing as Socially Harmful Speculation," which I wrote in 2019. Forgive me, I was still young and idealistic and concerned with left-wing/anti-market bias type things.

In the piece, I lay out what futures markets do and what finance is all about: re-arrangement of risk. You move exposure from someone less able/willing to carry it to someone more able/willing to carry it. "somebody always carries the risk," I mention in the piece (my original title but alas not; we needed clickbait).

Financial markets, including markets for complex instruments that may just look like speculative casino bets, allow important real transactions to occur. And in a brilliantly decentralized way, they bring into harmony people whose information, values, goals, and risk aversion differ.

...and then I go haywire and venture into some minutiae of 17th-century Netherlands and the East India company & the first stock exchange. How many financial historians does it take to change a lightbulb...

Anyway, I think that's the best I have.

Now, are there myriad ways in which fiat money and government regulations (bailouts?! restrictions? #841903) make this process go off-the-chart bonkers? Sure thing. Is that a reasonable charge to lay at financial markets' doors?! Nahnah.

Otherwise, my fav recommendation here is Goetzmann's Money Changes Everything: How Finance Made Civilization Possible.

Peace out, friends

Some other relevant writing:

How Societies Save for an Uncertain Future
Money is What You Hold Between Production and Consumption
The Hobbit Teaches that We Can’t Eat Money, also featured in this MONEY CLASS (#793537)
[Two Grand Traditions in Financial History](https://thedailyeconomy.org/article/two-grand-traditions-in-financial-history/
Who Benefits From Ruthless Capitalism?

view all related items

75 sats \ 0 replies \ @SimpleStacker 27 Jan

"There’s No Such Thing as Socially Harmful Speculation"

One thing i'd like all of us free marketeers to think about though is the "externalities of empathy".

It's kinda like how I explain why I'm against Universal Basic Income, even if it's promised as a replacement of other social programs.

And the reason is that I don't trust our voters to let people suffer the consequences of their actions. Suppose we replace food stamps and medicaid with UBI. Inevitably, some people will still squander their UBI. Then, empathic voters will vote in new social programs to deal with those who've squandered their income and now cannot feed or support themselves.

So, one argument regarding the ill social consequences of financial speculation and gambling is the externality of empathy

Take it to a broader level, and we are talking about bank bailouts and Keynesianism, which is just the same thing at the macro scale.

5 sats \ 1 reply \ @Undisciplined 27 Jan

I try to think through what the Bitcoin price "knows" that I don't.

Obviously, there are endless correct answers to that, but I specifically want to know why my valuation is so much higher than the market's.

Again, there are lots of possible answers, but I do think the willingness to hold risk is part of it. That's not me knowing anything that anyone else doesn't. It's just that with my low time preference the volatility doesn't bother me.

There's also the part of EMH where you can arbitrage superior knowledge. In the case of bitcoin, I'm essentially betting on my whole (minority) worldview being correct. I'm comfortable doing so, because it took a lot of study and reflection, that others haven't bothered to do, to arrive here.

The other element of EMH that I think about is that everyone has to be sufficiently capitalized for it to work. We may be on a corner where the people who are on my side don't have anymore capital to pour into bitcoin and therefor the price is waiting for other people to be convinced. In other words, the intensive margin is tapped out, which is inefficient.

37 sats \ 0 replies \ @denlillaapan OP 28 Jan

There's also the part of EMH where you can arbitrage superior knowledge. In the case of bitcoin, I'm essentially betting on my whole (minority) worldview being correct. I'm comfortable doing so, because it took a lot of study and reflection, that others haven't bothered to do, to arrive here. 100%

The last bit about EMH is critical, too. The flipside of inability to short certain assets (i.e., Shiller has made the case that property prices aren't incorporating all info since there are no good ways to short houses/put downward pressure on housing prices).

29 sats \ 0 replies \ @kepford 27 Jan

Thank you!

24 sats \ 0 replies \ @Shugard 27 Jan

Thanks for this fantastic insight! Even the headline was provocative!

It's all basically just a game of knowledge! I like it!

11 sats \ 0 replies \ @TNStacker 28 Jan

Most excellent, sir.

10 sats \ 2 replies \ @charonnakamoto 28 Jan

Establishment of capital markets and pensions for urban workers reduces the need for bringing up more children

It is also funny that when people are unable to plan for their retirements and raise children at the same time(due to fiat debasement and inflation), they decide not to have children. Either way, seems, capital markets seem to lead to fewer children, haha

9 sats \ 1 reply \ @denlillaapan OP 28 Jan

a little bit, yeah.

Economically speaking, you're tapping into other people's children (i.e., by being the owner of the company that employs them and thus benefitting from their work.).

Also why the "invest assets" as a solution to pension only work for a short time and/or in small places. Globally speaking, we can't all just hold assets at get rich; some peeps gotta produce our Apples (and apples) for us

0 sats \ 0 replies \ @charonnakamoto 28 Jan

This is a fascinating way to look at it. It presupposes only financial and material well-being(through tapping into other people's children) as being sufficient. I think it is a necessary condition, but don't think it is by itself a sufficient condition. It doesn't discuss emotional well-being and how having kids to support you might give that emotional comfort. Then again, I am only speculating; kids could show the middle finger and not care a hoot about their parents when they grow up.