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World Association of International Studies

PAX, LUX ET VERITAS SINCE 1965
Post "Productive" vs "Speculative" under the Microscope
Created by John Eipper on 09/05/19 6:11 AM

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"Productive" vs "Speculative" under the Microscope (Tor Guimaraes, USA, 09/05/19 6:11 am)

John E commented on my last post with a question, "Is there a way in today's economy to distinguish between 'productive' and 'speculative' investment?"

It is a very good question and the answer is yes. It is true that many business innovation projects, the development of new products, and/or changing business processes, may involve substantial uncertainty and may be considered speculative in that sense. Whether or not a particular application for a bank loan is too risky or not, should ultimately be a decision by the loan department, which in turn, should be properly supervised.

On the other hand, if bank loans are used to invest in the stock market (sometimes at very high leveraged rates with options and other derivatives) and totally unsupervised, this in the aggregate is not only extremely risky to the entire financial system, but it is also totally unproductive for the nation as a whole (in accounting terms, such loans have no impact on the GDP) and can be profitable only for the speculators. Thus, using CB money creation for this purpose, as we are wildly engaged in today, is a massive government subsidy for the speculators.

JE comments:  Can we hone in on Tor's final point--specifically, have Central Banks largely turned into bottomless piggy banks for speculation by banks?  (Yikes, that was a clumsy question.)  My initial answer would be yes.  At least it seems this way from the hinterlands of Main Street/Flyover Country.


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