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CURRENCY SPECULATION AND THE TOBIN TAX
"If fifty men did all the work,
And gave the price to five,
And let those five make all the rules -
You'd say the fifty men were fools,
Unfit to be alive." - Charlotte Gilman, (1860 - 1935), American writer
Speculation in foreign currencies has reached astronomical dimensions, with professionals like George Soros becoming billionaires in the process. But what wealth do they create in all of this? The fact of the matter is that they get something for nothing - and their unearned profits are orders of magnitude more than an ordinary working person could possibly save in a lifetime, all for a few hours of playing the market!
If the foreign currency scene was just like a casino in which players bet amongst themselves, then ordinary folk could not complain. But that's not the case at all, which is why it's so lucrative. Some of the unwitting downline losers are taxpayers, ordinary consumers, and small investors in the share market and superannuation funds.
Furthermore, in an age of increasing globalisation, when currency speculators are so big and influential that they can manipulate the very markets in which they're playing, they can sway national economies at their whim. That the foreign exchange market is now so massive as to be, in itself, a source of increasing instability in the economic world is reason enough to clamp down on it. But the big reason, it may be argued, is plain ethical: to reap where you don't sow means that, for every million that goes into a speculator's bank account, some other people somewhere are going to have to produce a million dollars worth of wealth for which they will not get paid.
The fact that this outrageous form of legalised robbery can have persisted for so long without any preventative action being taken by governments (except, perhaps, in Malaysia) is disturbing to say the least. And, when a fairly effective remedy has long been proposed, it becomes doubly disturbing.
The way speculators have been able to profit until now is by feeding on economic instability and its resulting currency fluctuations. The odds are with them that they can make a small, profitable gain in each of many transactions, but do so in massive enough dimensions as to make hefty profits. The proposed remedy is the so-called Tobin tax, whereby a very modest (about 0.2 - 0.5%) tax would apply to the approx. $1.8 trillion that crosses borders every day. The revenues from the tax could fund sustainable development programs, peacekeeping activities and the like.
HOW IT WORKS
The Tobin tax would be enough to make nearly all speculative dealings unprofitable, as well as to alleviate currency instability and related financial crises caused by the immense present levels of foreign exchange trading. This measure would have little effect on ordinary, legitimate transactions. It has to be said, however, that a few Geonomists argue against the Tobin tax, emphasising how the ability to gain ordinate power and to manipulate exchange rates would largely be solved when the land issue is addressed. In any case, others criticise it as it would penalise and obstruct non-speculative financial transactions.
Windfall profits of huge proportions are also made in the share and commodities markets. In a truly free and fair market, the share market plays a useful role in bringing enterprises and investors together for their mutual benefit. But purely speculative profits are unearned in the sense that the profit-maker has created no wealth, and again some other mugs, in the end, have to indirectly pay for this.
The solution lies in distinguishing between these speculators and long-term investors. The latter are looking for a safe place to invest and a fair rate of return in the medium and long term. Something similar to the Tobin tax might do the job, in that a modest tax would neither deter genuine investors nor greatly diminish their returns in the long run. But it would be enough to deter parasitic speculators primarily seeking short-term profits.
To some extent, the opportunity to make quick bucks exists because of speculative opportunities in the land "bubble" market and the consequent boom-bust economic cycles fuelled by land monopoly capitalism. The whole issue of boom-bust cycles deserves its own section.
"I think in principle it's a good idea to tax unimproved land, and particularly capital gains (windfalls) on it. Theory says we should try to tax items with zero or low elasticity, and those include sites." - James Tobin, (1918 - ) American winner of the Nobel Prize for economics ... Read the entire article
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper