Advantages and Disadvantages of Speculation

Advantages of Speculation

Speculators play an important role in financial markets, because they give the markets the extra buoyancy needed to carry out trades. They are also important in the financial markets because “they provide information about the fundamental values of investments” (Duffie). Speculators will only buy when the conditions are favorable and when the conditions are bad they will sell. At times, their forecasts are going to be correct and they will make a tidy profit from the venture. When they speculate in the financial markets, they help the prices of stocks and currencies to “more accurately forecast an investment’s, spreading useful information” (Duffie). To illustrate the importance of speculation in the financial markets Darrell Duffie says, “The clearest evidence that Greece has a serious debt problem was the run-up of the price for buying CDS protection against the country’s default” (Duffie). The argument here is that Greece pried its bonds before it gave speculators a chance to express themselves and thus the bonds were inaccurately priced.

Disadvantages of Speculation

Speculation is at times detrimental to the financial markets. One of the disadvantages of speculation is that it can cause the prices of commodities and currencies to deviate from their intrinsic value if speculation is carried out under misleading information. Speculation has been blamed for some of the economic bubbles experienced in the world. This is true as noted by John Keynes in 1936 when he wrote “Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation” (Futia 38). Speculation has also been accused of causing short term volatility in financial markets.

Greek crisis-pros and cons

Greece’s fiscal condition has not only led to serious financial and political turmoil in the Euro zone but has also caused several discussions regarding whether the nation should be assisted to prevent pressure increase among the Euro countries.

Euro countries should save Greece to protect the nation from complete closure of its economic systems. The countries should save Greece since Greece’ government is unable to pay for all its debts. If Euro countries do not save Greek from its financial condition, the nation would issue its local currency which would operate in the same way just like the Euro instead of substituting it. The outcome for Euro countries would thus be disastrous and therefore it is advantageous for Euro countries to save Greece from its financial crisis. If Euro Zones did not save Greek, then there would be lack of credit throughout the globe. This is because banks and other financial institutions would face substantial losses and this could drastically reduce their lending capacities (Futia). However, Greece should not be saved and if the nation is not able to deal with its problems, it should seek help from the IMF but not from the Euro countries. If Greece is saved from its financial problems by Euro countries, then this would encourage its citizens and other economically undisciplined states to keep on pilling on communal obligations. The idea of leaving Greece to deal with its own financial problems is better off for Euro countries since helping Greece is likely to undermine self confidence in the euro zone. Research shows that the only way that Greece can maintain a realistic financial discipline is through market pressure. For a state with a large public debt and budgetary balance like Greece, the market starts to distrust its credit capacities and due to this, no one is ready to offer credit to such a country. By saving Greece, Euro zones are likely to lose market pressure and this could cause disaster because lack of market pressure leads to disastrous results. Euro countries are, therefore, better placed if they don’t get involved in Greece’s financial problems (Futia).

Works Cited

Anghelov, Gheorghi. “Greece should not be saved.” 2011. Web.

Duffie, Darrel. “On the costs and benefits of speculation.” Synthetic Assets. 2012. Web.

Futia, Carl. The Art of Contrarian Trading: How to Profit from Crowd Behavior in the Financial Market. New York: John Wiley and Sons, 2009. Print.

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