Why We Need To Tax Financial Speculation

By Vaughan Gunson
Tax Justice campaign coordinator
from CAFCA’s “Foreign Control Watchdog”, August 2010

The figures are mind blowing. The International Monetary Fund (IMF) estimates that the financial crisis cost the world $US11.9 trillion. The human cost is immeasurable. And it ain’t over. The international bailouts of banks and other financial institutions have seen trillions of dollars of private debt off-loaded onto governments. The financial crisis has not been fixed. The problem has just been shifted. The bailouts have created a “sovereign debt crisis”, which is breaking first in Europe. Governments worldwide are scrambling to get debt under control. The “fiscal stimulus” that accompanied the wave of banking bailouts has now passed over to “austerity measures”, which means cuts to public services and higher taxes for grassroots people. Those who had no part, no say, and no responsibility for the financial crisis are being made the victims, many times over.

The leaders of a club of rich countries called the G20 (Group of 20) recently met in Toronto, Canada. The strategy of making us pay for the crisis was clear. G20 leaders issued a joint statement on 27/6/10 committing member countries to halving their budget deficits by 2013 [1]. As Toronto resident and anti-capitalist campaigner Naomi Klein wrote: “Faced with the effects of a crisis created by the world’s wealthiest and most privileged strata, they decided to stick the poorest and most vulnerable people in their countries with the bill” [2]. This is what the world’s elite are trying to get away with, if we let them.

Austerity Hits New Zealand

The New Zealand economy nose-dived into recession in 2009 as the financial crisis quickly spread to the real economy. There have been widespread job losses and general job insecurity, as well as stagnant or declining wages relative to inflation. Many people are struggling under the burden of mortgage and credit card debt. Our Government has not bailed out banks like the US or Britain, but the impact of the crisis on the Government’s budget has been similar to overseas: declining tax revenue from falling economic activity, combined with increased spending demands, like unemployment benefits.

The policy “solution” that the John Key government is pursuing is no different from the dominant policy response by governments around the globe. Protect the rich and do everything possible to get the economy going again under much the same model as before. Increase taxes on grassroots people, while restricting their access to public services. National’s 2010 Budget saw direct cuts to Government spending, like early child care. And effective cuts, as funding increases for health and education failed to keep pace with inflation. More social spending cuts have been signalled. Many public sector employees are facing the axe as the budgets of Government departments are slashed.

Amidst this austerity, National still delivered tax cuts to the rich and big corporates. This benevolence to the rich was funded by increasing the goods and services tax (GST) from 12.5% to 15%. It’s widely accepted that GST is a regressive tax which disproportionately impacts on grassroots people, who spend most of their weekly income on the basics. Many people in New Zealand and around the world smell a rat. The scale of the much reported banking bailouts, the ongoing impact of the crisis on our lives, as we worry about our jobs and paying off debt, has raised the question for many: is there something wrong here?

The Speculators

We need to understand what’s wrong so we can organise strategically to defend ourselves. Crucial to that understanding, is grasping the dominant role financial speculation has assumed in the world economy. Financial speculation is defined on Wikipedia as “the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives, or any valuable financial instrument to profit from fluctuations in its price, irrespective of its underlying value” [3]. Speculation has long been a part of the capitalist economy, with its damaging effects well documented, if often ignored.

But what we’re seeing today is historically unprecedented. In 2008, the trade in derivatives [4]– the most speculative of financial transactions – was $US500 trillion, which was ten times the value of the entire world’s output of tangible products and services. Much of this speculative activity is computer automated, with “purchases” lasting minutes or even seconds. The rapid growth in commodity speculation over the last decade has led to such perverse phenomena as a barrel of oil being traded, on average, 27 times before it reaches the pumps.

The reason for all this speculation is quite simple: the profits to be made from traditional investment in capitalist enterprises that produce something of value has been in decline since the post-war economic boom came to an end in the early 1970s. Today’s unprecedented levels of financial speculation represents the desire, on the part of the world’s elite, to continue reaping high profits, way more than the stagnant real economy will allow [5]. To achieve this, governments worldwide have removed all barriers to financial speculation and encouraged a supply of cheap credit by banks and other sanctioned lenders. A giant financial casino has been created, where everything that fluctuates in price has attracted the speculators [6].

Just like in the real economy, where large companies grow to dominate industries, so it is in the world of financial speculation. The last two decades have seen the rise of giant investment funds, where investors – usually rich wealthy ones – pool their money together in the hope of achieving better returns from long term investments and short term speculation. Billion dollar pension funds and hedge funds, by the very size, can influence the markets. In 2008, it was estimated that pension funds globally controlled US$20 trillion in assets. Hedge funds, which are most often involved in pure speculation, managed around $US2.5 trillion immediately prior to the financial crisis[7]. In sum, financial speculation has grown to 60 times the level of the world’s combined gross domestic product (GDP)[8].

Government-Banks-Speculator Nexus

The governments of the world have acted as the “public facilitators” of global financial speculation. They’ve done so in partnership with the big banks, who are the “private facilitators” of speculation. The world’s big banks are either directly engaged in speculation, being at the epicentre of all financial activity and thus able to read trends and manipulate the markets, or they supply the credit with which others play in the casino. Thus the banks are the biggest speculators of them all. And they’ve got fatter and fatter. America’s six largest banks have combined assets totalling 63% of the United State’s gross domestic product. The extent of the banks’ ascendency is revealed by the fact that only 15 years ago the combined assets of the six biggest banks were 17% of GDP9.

It’s an open secret that Wall Street banks have entered markets with the aim of generating a price bubble. After making their speculative profits they’ve exited the market, collapsing the bubble, before moving on to the next market. The housing bubble followed the dot.com bubble, then the oil price bubble. Next it was the food price bubble. These aren’t speculative bubbles caused by the random vagaries of the market, but orchestrated on high by powerful banking interests, with the blessing of Washington regulators.

Grant Morgan, in his essay “Beware! The End is Nigh! Why global capitalism is tipping towards collapse, and how we can act for a decent future”, argues that financialisation is the central pillar of neo-liberalism, the economic agenda promoted by Big Business and imposed by governments around the world over the last three decades. He likens the massive expansion of the financial sector, with its easy credit and speculative bubbles, to a global Ponzi* scam, one protected by government laws, corporate politicians and state officials[10].

[*A pyramid scheme whereby original investors are paid beguiling dividends from new advances. Bernie Madoff is the most high profile recent perpetrator. These scams are still called Ponzi schemes, after Charles Ponzi, who provoked the 1925 Florida real estate bubble. Ed.]

Speculation has been hard-wired into the global economy. Those who control financial systems reap the rewards, but only by causing structural damage to the whole system. All reasonable logic says that this must end, that it’s unsustainable. But as global capitalism has bet everything on financialisation, there’s no possibility of turning back. The government-banks-speculator nexus, from the point of the view of the world’s elite, has to continue[11].

Crimes Against Humanity

Waves of global speculation have had an enormous impact on the world economy and the lives of the grassroots majority. The housing bubble pushed house prices through the roof and caused grassroots people to be burdened with historically high levels of debt. When the housing bubble in the US burst in 2007, the big financial players quickly went looking for a new market to speculate in. They turned to another necessity of life: food. World rice prices – a staple for much of the world’s population – increased by 320% between January 2007 and June 2008. The price for wheat went up 240%[12]. There was no reason for this other than the deliberate creation of a price bubble by powerful financial players able to shift billions into these markets, chiefly big American banks, with the rest following.

That bubble burst as the financial crisis hit, but food prices haven’t come all the way back down. Once prices rise, other corporates in the food chain have an interest in keeping prices at the higher level. Food distributors and supermarket chains are quick to seize the opportunity to skim some extra profit. So we’re still paying more for rice and bread than we were in 2007. Governments, big and small, are facilitating this crime against humanity. In 2000, the United States government passed the Commodity Futures Modernization Act, which allowed non-grain producers to buy derivatives on the grain futures market. The intended beneficiaries of the law change: pension funds, hedge funds, and all sorts of other financial speculators, including big banks.

Of course if you’re a big corporate bank you don’t want to actually physically own a whole lot of grain, to sell or do anything else with it. But what derivatives markets do is allow speculators to trade in pieces of paper (“promises to buy” in the future) instead. Jayati Ghosh, a respected Indian researcher and campaigner, explains: “[W]hat’s happened, really, in this decade, is that the possibility of speculation in food grain has been delinked from the physical holding of the commodity: you don’t need to hold a commodity anymore; you can hold pieces of paper, which are contracts on the price for the future”[13] .

Speculative bubbles never last, but if you’re a big player able to manipulate prices through the sheer scale of your purchases, then you can make a killing. And it’s a killing field indeed, because grain, or any other basic food commodity that gets turned into a speculative bubble, means a global price spike, which causes the world’s poorest to starve. In 2007-08, the number of people suffering from malnutrition globally rose from 800 million to one billion. This was the direct result of financial speculation in food. Ghosh believes another food bubble is being manufactured. World food prices have been rising since April 2009, and not because of increasing demand or contracting supply, but speculation again in commodity futures markets.

Speculation In New Zealand

While New Zealand’s finance sector is not big by world standards, the same banks-speculators-government nexus exists. Since 1984 a priority of both Labour and National governments has been deregulation of all parts of the financial industry. This has opened up New Zealand’s financial markets to international and local speculators, resulting in price volatility and inevitable cycles of boom and bust. One market that attracts high levels of speculation is the New Zealand currency market. The Kiwi dollar is the 11th most traded currency in the world. New Zealand certainly isn’t the 11th biggest economy in the world with a massive turn over of trade. Global speculators have created a market for the Kiwi dollar. It’s like a special game of roulette has been created in the South Pacific for the world’s high rollers.

Despite its relatively small size the New Zealand stock market is also subject to plenty of speculative activity. The volume of shares traded is quite substantial. In June 2010, for example, daily turnover ranged between $50 million and $120 million. Like all stock markets around the world a large percentage of this trade is by speculators – mostly overseas ones – betting on share price fluctuations. Share purchases for long term investment are only a small fraction of regular trading activity.

The John Key government wants to encourage more speculation in New Zealand. Perhaps this is not surprising, given that John Key made his fortune in the world of high finance. But it also reflects the fact that the Government, and the economy as it stands, is locked in tight to the model of hyper-financialisation which remains the source of so much profit for the rich. The Government has given the green light for NZX, the company that runs the New Zealand stock market, to create a derivatives market for milk. This market for “promises to buy” will see milk prices directly influenced by local and international speculators. Milk and milk products will therefore get caught up in any food price bubble[14].

John Key has also floated the idea of turning New Zealand into a “financial hub”. The plan rests on enticing global investors to New Zealand with the promise of tax breaks. A recent Inland Revenue Department report entitled “Allowing a zero per cent tax rate for non-residents investing in a PIE [portfolio investment entity]” reveals what’s being considered. Under this proposal, overseas investors would be allowed to operate in this country and not pay New Zealand tax on their international investments. Perhaps the greatest wrong is the establishment of an Emissions Trading Scheme, or pollution market, as it should truthfully be known. The Government’s pollution market will be another opportunity for the speculators, which is precisely why the world’s big banks and other financial institutions are pushing carbon trading as a solution to climate change. It won’t be a solution, far from it, but it will be another market for them to profit from.

Tax The Speculators!

The scale of the bailouts, in the US and Europe in particular, has caused great anger amongst grassroots people worldwide, and this has led to some politicians proposing measures to try and reform the financial industry. The global crisis has not, however, reversed the “free licence” that governments have given to the world’s financial speculators. Their ability to grow their wealth and power remains intact. But they are potentially vulnerable, for the reason that the role the banks and other financial institutions have played in the crisis is becoming understood by many grassroots people. It’s therefore imperative that our side flames the fires of anger by further exposing the government-banks-speculator nexus, while at the same time putting forward solutions.

That’s where the New Zealand campaign for tax justice launched by Socialist Worker and the Alliance Party comes in. The immediate focus of the campaign is a non-citizens’ initiated referendum petition which requests Parliament to 1) Remove GST from food; and 2) Tax financial speculation. These two demands address major injustices in New Zealand’s tax system. Grassroots people have to pay tax on one of life’s necessities, food, while financial speculation goes untaxed. Overseas speculators playing New Zealand’s financial markets do not pay a cent of tax on their market gains to the New Zealand government. Likewise, the rich in this country pay no tax on their wheeling and dealing. The main exemption from GST today is for “financial services”, which includes all the activities associated with financial speculation. Taxing financial speculation, as demanded by the Tax Justice petition, would be a progressive reform of a tax system that currently favours the wealthy[15].

Build The Real Economy

The first principle of progressive taxation is that you tax the rich more than poor. On this count taxing financial speculation is progressive. It’s only the very rich who speculate. The second principle of progressive taxation is that you tax things that society wants to discourage. Global financial speculation ruins more lives than smoking, and costs society astronomically more in dollar terms, so if any bad habit needed to be taxed, it’s financial speculation. The best way to make the speculators pay more tax is to hit them at the point where they accumulate their wealth, which is when they buy and sell. This can be done through what’s called a Financial Transaction Tax (FTT), a small percentage tax (perhaps 1% or less) on financial transactions.

Barry Coates, executive director of Oxfam New Zealand, is all for a Financial Transaction Tax, so that “taxes on life’s essentials [like GST]” can be replaced “with a tax on socially destructive financial speculation”[16]. A Financial Transaction Tax would net billions, for example, from speculative trading in the Kiwi dollar alone. Not all of this trade occurs in New Zealand, but a sovereign country can place a tax or levy on the trade of its own currency taking place any where in the world17. A big positive of a FTT is that it would reduce the volume of short-term financial transactions, often computer automated, by large institutional speculators, big banks, pension funds, hedge funds, and the like. A small percentage tax at the point of purchase and sale would wipe out any profits the really big spenders are able to make from short term speculation.

The main obstacle to taxing the speculators is political. The beneficiaries of the current environment of gung ho speculation will oppose any move to curb their profits and power. That’s what privileged elites have always done. They’ll put up arguments like: “it’s too difficult”, when it’s not. They’ll say it will cost “Kiwi jobs”. It won’t, because speculation only benefits the speculator, creating economic havoc in the process. The global financial meltdown of 2008 will forever be proof of this. The political arguments for taxing the speculators can be won. Following the global financial implosion, the time is right to popularise a tax which hits the most hated global purveyors of greed and exploitation. That’s the aim of the Tax Justice campaign (for more information go to http://www.nogstonfood.org/).

In the longer term we need to wrest control of the economy off the speculators, banks, and those politicians wedded to hyper-financialised capitalism. We need to re-engineer the economy and direct energy and expertise into the sustainable production of real things, useful things, by useful people. Deciding the direction to go is not really the problem, there’s plenty of good ideas around that can guide us towards a more people-centred economy. The challenge is connecting with people on a mass scale, and achieving the necessary unity of action to begin that journey. A popular campaign for tax justice could be a spearhead for a wider movement that takes on the speculators and raises an alternative vision of an economy that works for us.


End Notes

1. Larry Elliott and Patrick Wintour, “G20 nations commit to halving budget deficits by 2013”, guardian.co.uk, 28/6/10.

2. Naomi Klein, “Let’s take no orders to slash and burn from this G20 club”, from guardian.co.uk, 29/6/10.

3. See http://en.wikipedia.org/wiki/Speculation.

4. Derivatives are contractual promises to buy a commodity at an agreed price in the future. See http://en.wikipedia.org/wiki/Derivative_(finance).

5. One measure of the floundering real economy is under-utilisation of industry capacity, which was 70-80% prior to the financial crisis, and has worsened since.

6. See the section on financialisation, “Follow the money”, in Grant Morgan’s essay, “Beware! The end is nigh! Why global capitalism is tipping towards collapse, and how we can act for a decent future”, Unity Journal, March 2010, pp16-27.

7. See http://en.wikipedia.org/wiki/Hedge_funds.

8. Barry Coates, “We could replace tax on essentials with one on destructive speculation”, Stuff News, 2/3/10.

9. Grant Morgan, “Beware! The end is nigh! Why global capitalism is tipping towards collapse, and how we can act for a decent future”, Unity Journal, March 2010, pp.20-21.

10. Grant Morgan, ibid. p.21

11. But the point where it’s impossible for governments to be the “lender of last resort”, and bailout the system again, is fast approaching. The whole hyper-financialised world economy faces collapse as it comes up against real world economic and political limits.

12. Jayati Ghowsh interview, The Real News Network, http://therealnews.com/t2/index.php?option+com_content&task+view&id+31&Itemid+74&jumival+5067

13. Jayati Ghowsh interview, ibid.

14. Hamish Rutherford, ‘‘Serious interest’ in derivatives”, 18/4/10.

15. He wasn’t speaking for all New Zealand’s mega-wealthy, but Trade Me founder Sam Morgan was telling the truth when he said he hardly pays any tax.

16. Barry Coates, “We could replace tax on essentials with one on destructive speculation”, 2 /3/10.

17. Barry Coates, ibid. Collecting this levy should be one of the functions of a Reserve Bank operating in the interests of the grassroots New Zealanders rather than the international financial institutions.