Dear Editor
Dear Editor Speculation I feel tempted to say a word about one part of George P. Brockway's "Why Deficits Matter" (NL, March 8). Brockway draws a distinction between speculation and productive...
...It would be fantasy to suppose that the happy Marathon stockholders, having unloaded at the top of the market, have not been encouraged to bid up the shares of other companies thought susceptible to takeover...
...The imagined event has to be a long time coming...
...Brockway draws a distinction between speculation and productive investment that is entirely misleading...
...The market does not distinguish where the buyer of a security got his money from...
...In fact, it has no way of knowing...
...but they were not productive investments...
...Steel borrowed has surely helped to keep the interest rates high...
...Productive investing is like speculating in that it is not a zero-sum game, but it differs in that goods and services are produced...
...Eventually, the money will find an outlet in directly productive new investment, unless it is consumed or hoarded...
...It is the same with margin accounts, which soak up available funds and thus help keep both securities prices and interest rates higher than they would otherwise be...
...In either case, the seller of the stock can do three things with the money he gets—consume it, hoard it, or put it into some other investment...
...Los Angeles MARK STEIN THE NEW LEADER welcomes comment and criticism on any of its features, but letters should not exceed 300 words...
...If that new investment involves the creation of brick and mortar, it is directly productive...
...The economic effect, however, is the same...
...In brief, gambling is a zero-sum game that produces nothing but the players' pleasure or despair...
...A very large nonproductive tail keeps the productive dog off balance...
...Of course, there is a difference between a purchase of a share of stock on narrow margin and a purchase of the same stock out of savings...
...There I proposed definitions of gambling, speculating and productive investing that, I believe, disclose the different economic effects of the three kinds of activity...
...I'm afraid it simply is not so that "stronger demand for securities reduces interest rates...
...This, I should contend, is one of those instances in which Keynes' remark ("In the long run we are all dead") is appropriate...
...Governor Wallich's view, which is the standard one, is that such distinctions are idle because ultimately the results of speculating go into consumption, hoarding, or "bricks and mortar...
...But I would shut down margin accounts (as has been done before...
...stimulates investment...
...To cite an example, U.S...
...Governor Wallich says that "Eventually, the money will Find an outlet in directly productive new investment unless it is consumed or hoarded...
...Insurance companies and endowment funds tend to shy away from productive new investments...
...consequently risk is not a useful criterion for distinguishing among them, though it is the one ordinarily used...
...The Great Bull Market lasted six or eight years...
...The "stronger demand" is a speculative demand, and it attracts money away from productive investment...
...I would see what could be done to discourage borrowing to finance mergers...
...Holland's tulip mania increased in virulence from 1615-37...
...Washington, D. C. HENRY C. WALLICH Member of the Board of Governors Federal Reserve System George P. Brockway replies: To comment on Governor Wallich's interesting letter I must try to summarize points I made in "Why Speculation Will Undo Reaganomics" (NL, Septem-ber 7, 1981...
...As to the fact that the rest of my article on deficits was one sided, I admit the soft impeachment...
...Not much idle money is held at today's interest rates...
...This may be what the theory calls for, but it is flatly refuted by the present situation, when both exchange transactions and interest rates are at all-time highs...
...Comedy I especially enjoyed Hope Hale Davis' recent review of Stanley Cavell's Pursuits of Happiness: The Hollywood Comedy of Remarriage ("'Bringing Up Baby' and Others," NL, April 5...
...Her witty sendup of Cavell's pedantic noodling and intellectual game playing made the Harvard esthetician look like one of the fussy, bespectacled professors we have seen in so many screwball comedies...
...Steel abandoned plans to update its mills and borrowed $3 billion to acquire Marathon Oil...
...And I would not encourage a hundred speculative transactions (as the low capital gains tax does) in the bumbling hope of stimulating one new productive investment...
...Fewer than ] per cent of the transactions on the stock and commodities exchanges have anything to do with productive new investment...
...For this reason (among others), I would not try to prevent speculation...
...There is nothing productive about this...
...Professional traders can and do spend their whole lives buying and selling without ever touching a productive new investment...
...In the process, stronger demand for securities reduces interest rates and stock yields, reduces the cost of capital to investors, and in that way also stimulates investment...
...If it just leads to the purchase of an existing security, the same set of choices confronts each successive seller...
...Moreover, the $3 billion U.S...
...They absorbed, and ultimately destroyed, vast sums that could have gone into productive investments...
...The chances are overwhelming that the seller of the stock, whoever he is, will put his money into another investment...
...More important than all this is the role of the stock and commodities markets...
...Investment bankers (so called) are now mainly concerned with mergers and takeovers...
...In conclusion, I want to note that while I fully agree with the statement in the title that deficits do matter, I find the entire article so one-sided that in limiting my comments to the point I have made I do not mean to imply agreement with any of the rest of it...
...It took nine years for the South Sea Bubble to burst...
...It should be emphasized that all three activities arc risky...
...Speculating is not a zero-sum game: Over very long spans of time all who participate can gain, though some will no doubt gain more than others, but speculating is like gambling in that it only rearranges wealth that already exists...
...If you have a reasoned conviction, I'd think it irresponsible to pretend to what is called a "balanced view...
...1 agree with Governor Wallich that "The market does not distinguish where the buyer of a security got his money from...
...The first is speculation,the second you might call investment, depending on the stock...
...Few sellers of stock consume their principal...
...Some of these speculative frenzies might, in Governor Wallich's terms, be classified as hoarding or consumption...
Vol. 65 • April 1982 • No. 8
