What Are Speculation and Deflation, Just More Capitalism?

Written By: The WealthCycles Staff


What is speculation and what is deflation?


Depicted in the “lamestream media” as unethical and dangerous, respectively, in fact they are beneficial cornerstones of free market capitalism.

Speculation and deflation are two of the most hated words in lamestream media and new-age textbooks, thanks to the “New Economics” of John Maynard Keynes. But Keynes was an advocate for totalitarianism, which led him to endorse the abolishment of markets and free exchange in his book, The General Theory of Employment, Interest and Money, otherwise known as the “Bible of the New Deal”:

The spectacle of modern investment markets has moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reasons of death and other grave cause, might be a useful remedy for our contemporary evils.

Free people, free markets and the freedom to exchange was not on the agenda for Keynes. As we wrote in Johnny Keynes - The Motive and Method of Deception, his motive and methods were neither complex nor flattering. Chapter 13 from The Failure of the "New Economics" tears apart Keynes on the market bedrock principles of Expectations And Speculation.

The fireworks start near the 4-minute mark in this audio clipfrom the Ludwig Von Mises Institute. We will cite much of Henry Hazlitt’s Failure of the “New Economics,” but to further understand the true nature of speculation, we should first consult Hazlitt’s mentor, Ludwig von Mises, from Nation, State, and Economy:

Speculation anticipates future price changes; its economic function consists in evening out price differences between different places and different points in time and, through the pressure which prices exert on production and consumption, in adapting stocks and demands to each other.

Mises says on page 182 of his seminal work, Socialism:

Speculation is the link that binds isolated economic action to the economic activity of society as a whole.

Speculation is therefore simply anticipating market action; whether the market participant is the seller or the buyer, he or she is a “speculator.” To put to rest the hysterical calls to shoot the messenger for pointing out the flawed policy of debasing the currency, defer to how a market really works, as Mises writes in The Theory of Money and Credit:

The influence of speculation cannot alter the average level of prices over a given period; what it can do is to diminish the gap between the highest and the lowest prices. Price fluctuations are reduced by speculation, not aggravated, as the popular legend has it.

Apparently HowStuffWorks.com missed this passage above, and we took the website to task for mis-educating the public in Oil Speculation - Speculators Benefit Society.

On deflation, the new economics textbooks barely utter a sentence, but ensure unmitigated fear surrounds the prospects of lower prices through their brief and deliberately shallow characterizations, no mention of increasing purchasing power over time leading to increasing standards of living for all.

It is almost as if they say: “What war on poverty?”

Unmitigated fear of deflation is palpable among the lamestream media, just as they were taught in Economics 101 & 201, and this is for good reason. Were deflation allowed to take its natural course, and play its role in healing the economy, the banking establishment and other imprudent institutions would be wiped out, only to have the assets that remain post bankruptcy taken over and managed by the prudent survivors.

Let us remember: Deflation is a “decrease in the supply of money,” and price deflation is the natural blessing that follows. Everybody loves lower prices, which result in a higher standard of living—the natural order of a real free market society if those who espouse the debasement of currency were once and for all thrown to the curb!

German economist Jörg Guido Hülsmannhas correctly and inextricably linked Deflation and Liberty (audiobook), and is a rare accurate voice on deflation:

Deflation… does not hide the redistribution going hand in hand with changes in the quantity of money. It entails visible misery for many people, to the benefit of equally visible winners. This starkly contrasts with inflation, which creates anonymous winners at the expense of anonymous losers. Both deflation and inflation are, from the point of view we have so far espoused, zero-sum games. But inflation is a secret rip-off and thus the perfect vehicle for the exploitation of a population through its (false) elites, whereas deflation means open redistribution through bankruptcy according to the law.

As we write in an earlier premium article dedicated to deflation, Hülsmann argues that there is no valid economic rationale for policymakers to advocate for inflation over deflation:

Either policy does not benefit the nation as a whole, but merely benefits a part of the nation at the expense of other groups.

The real question, he argues, is what kind of monetary policy is in alignment with the principles of a free society. He takes a look at the 1931 MacMillan report, which analyzed the global financial crisis afflicting the world at that time, the Great Depression. The report, Hülsmann notes, “recognized and emphasized that deflation was foremost a political problem. They clearly saw that deflation brings down the politico-economic establishment, which thrives on inflation and debts, and that it therefore brings about some circulation of the elites.”

Deflation puts a brake—at the very least a temporary brake—on the further concentration and consolidation of power in the hands of the federal government and in particular in the executive branch. It dampens the growth of the welfare state, if it does not lead to its outright implosion. In short, deflation is at least potentially a great liberating force…
In light of these considerations, deflation is not merely one fundamental policy option next to the fundamental alternative of reinflation. Rather if our purpose is to maintain and—where necessary—to restore, a free society, then deflation is the only acceptable monetary policy.

As we can see, there is more to the story of deflation than the television and print media let on. Even if we understand that Keynes himself was not to be trusted, the thing is, in economist Milton Freidman’s famous words, “we are all Keynesians now.” Therefore it is important to understand the irrational basis on which the false elites of the financial sector and mass media make their claims regarding both deflation and speculation.


Ludwig von Mises said simply in Socialism that “Without speculation there can be no economic activity reaching beyond the immediate present.”

Keynes's complained: "The actual, private object of the most skilled investment today is 'to beat the gun’ as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow." The half-crown is the English half-silver dollar. Hazlitt’s retort is pointed:

This is a peculiarly unfortunate image for Keynes, the advocate of government spending, deficit financing, and inflation, to have used.
For if the half-crown is depreciating, it is depreciating because the politicians are printing too much money, and if the half- crown can be passed on, despite the other fellow's unwillingness to take it, it is because the politicians have made it legal tender.
Keynes forgets that what he is describing is not merely the purpose of stock-market speculation, but the purpose of enterprise as well. For the entrepreneurs who make the greatest profits will be the minority who first and best anticipate the wants of consumers, who, if Keynes wishes to put it that way, 'beat the gun' as compared with the majority of their competitors.

Let us take a look at a time period during which the media was crawling with news reports of malicious speculators selling and buying goods and services to one another, 2008. Google trends says search volume on the term “speculation” hit its peak, and we wrote of the time In The Looming Food Crisis, that “herds of speculative investors [were] enabled by new financial products, developed by megabanks like Goldman Sachs and Barclays, to push prices higher and higher.”

Speculation Google Trends

While market innovation allows speculation to take creative forms, we should remember that rampant speculation is analogous to maximum market efficiency. In this 2008 example, speculators buying commodities took on the risk of a fall in prices from the farmers. The farmer is realistic, Jim Grant explains hypothetically, “and he sees that the price of cotton for October delivery is well above his cost of production. It is now the Fourth of July, and long weeks of uncertainty stand between him and his harvest. By selling forward an unharvested portion of his crop, he is able to lock in a profitable price. This he does with the self-interested help of the speculator."

Grant makes an interesting distinction between the gambler and speculator. The speculator, Grant maintains, bears risks that come into existence prior to the speculator's decision to bear it. "In a world without speculators, every farmer would have to hedge his or her own crops, every banker his or her own securities, and every insurer his or her own promises to underwrite the next disaster. In gambling, no risk of loss existed before a casino patron sits down to try his luck. The risk borne by the gambler, like that by the skier, is created specifically by the participant for the occasion."

Of course Keynes specifically calls speculation gambling; if left to his benevolence, he would outlaw the market, as he called for in his ranting work created to excuse socialism. Here, Ludwig von Mises’ clarion response:

Speculation in the capitalist system performs a function which must be performed in any economic system however organized: it provides for the adjustment of supply and demand over time and space.

Writing in The Ultimate Foundation of Economic Science, Mises adds, “Every action is a speculation, i.e., guided by a definite opinion concerning the uncertain conditions of the future.”

In 2008 speculators believed economic fundamentals were improving, and that suppressed interest rates would ensure that extra cash would “slosh around and find its way into places like commodities and precious metals—stores of value that have been valuable for thousands of years,” as we wrote in Those Damned Speculators. What was the outcome for those who made an error in speculation?

CRB Commodities Index 2008

Above is the CRB index showing commodity prices. Some speculated correctly: the farmer who put the risk of price declines in the hands of a professional speculator successfully transferred his risk.

Henry Hazlitt adds color to the history of deriding speculators—it is a tradition aimed at defending the principle of redistribution through inflation. Perhaps the historic joy of an increasing standard of living brought about through deflation is linked more closely to speculation than one may imagine at first glance. 

From Chapter 13 of The Failure of the "New Economics," we let one-time NY Times writer Henry Hazlitt take it away (from below this point):

In attacking "speculation" in Wall Street, Keynes forgets that all enterprise, all human activity, inextricably involves speculation, for the simple reason that the future is never certain, never completely revealed to us. Who is a greater speculator than the farmer? He must speculate on the fertility of the acreage he rents or buys; on the amount and distribution of rainfall over the coming crop season; on the amount of pests and blight; on the final size of his crop; on the best day to sow and the best day to harvest and his ability to get help on those days. And finally he must speculate on what the price of his crop is going to be when he markets it (or at what day or price to sell for future delivery). And even in deciding how much acreage to plant to wheat or corn or peanuts, he must guess what other farmers are going to plant, and how much they are going to harvest. It is one speculation after another. And he and every entrepreneur in every line must act in relation to some guess regarding the actions of other entrepreneurs.

When all this is kept in mind, Keynes's attack on "speculation" begins to look pretty silly. His contrast between "speculation" and "enterprise" is false. If he is merely attacking bad speculation, then it is bad by definition. But intelligent speculation, as economists and market analysts have pointed out over and over, mitigates fluctuations, broadens markets, and increases production of the types of goods that consumers are most likely to want. Intelligent speculation is an indispensable and inherent part of intelligent production.

But Keynes deplores human freedom; he seems to deplore practically all the financial progress of the last two centuries:

 Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise be- comes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism.

This tirade, which treats speculation as merely a synonym for gambling, reflects the prejudices of the man in the street. The difference between gambling and speculation is clear: in gambling, the risks are arbitrarily invented or created; in speculation, the risks already exist, and somebody has to bear them.

In gambling one man wins $1,000 and another loses it, depending on whether a ball falls into an odd or even number on a roulette wheel or on which horse comes in first on a race track. But the wheel could be spun and the race could be run without the betting, without either losses or gains. The world would probably be richer rather than poorer if gambling casinos and race tracks did not exist at all.

But it is not so with the great organized exchanges, either for commodities or for securities. If these did not exist, the farmer who raises wheat would have to speculate on the future price of wheat. But as they do exist, the farmer or miller who does not wish to assume this risk can ''hedge," so passing the risk onto a professional speculator. Similarly, a corporation manager who knows how to make air conditioners, but does not wish personally to assume all the financial risks involved from the vicissitudes of competition and of changing market conditions for air conditioners, may offer stock on the market and let investors and professional speculators assume those financial risks. Thus each job is done by a specialist in that job, and is therefore likely to be better done than if either the producer or the speculator tried to do both jobs.

The market, consisting of human beings, unable to fore- see the future with certainty, will make mistakes—and some of them in retrospect will look like incredible mistakes. Yet Wall Street, notwithstanding its academic and political de- tractors, can be claimed as one of the outstanding triumphs of "laissez-faire" capitalism. The results speak for themselves. The United States has achieved the greatest volume of investment, the greatest capitalistic development, the greatest volume of production, the greatest economy of manpower, the highest standard of living that the world has ever known. And it has been able to do this in an important degree precisely because of the help rendered by the marvelous financial organization centered in Wall Street and not in spite of it. Surely it should have struck Keynes and his followers as worthy of notice that the country with the greatest "gambling casinos" and the greatest "liquidity" was also the country with the world's greatest capital development and the highest average standard of living!

What did the socialists use before candles? Electricity

Okay, WealthCycles is again at the helm. In the above paragraphs Hazlitt simply knocks it out of the park!

After this we can now look at some pretty sad commentary in current media. First, did John Bogle, highlighted by the Huffington Post, really call in Keynes to continue to push the idea of markets being “just a big casino”? Embarrassing reach from a man who mourns that the average share of stock is traded every four months versus every seven years, as it did during his formative years. Apparently candles are the new LED lights for Bogle and Huffington’s Michael Levin.

No wonder not one “New Economics” proponent has even attempted to refute his work. As with the mainstream economist and media response to the ideas of Ron Paul, ignoring the message and pounding on old canards is the only workable option.

To refute the socialist propagandists who say, “Speculation in grain futures knocks these prices out of [the bureaucrat’s] equilibrium” (which would lead to shortages we would add), we close the topic with Ludwig von Mises in Nation, State and Economy:

Speculation anticipates future price changes; its economic function consists in evening out price differences between different places and different points in time and, through the pressure which prices exert on production and consumption, in adapting stocks and demands to each other.


Again, inflation is an increase in the supply of “money” and deflation, the opposite.

The natural order of a free society is that of a rising standard of living through falling prices. Price deflation is the symptom in question resulting from the deflation of an artificially inflated supply of “money.” This natural phenomenon of lower prices is something the modern world has been deprived of since the advent of the institutionalized monopoly on printing money.

Think about the computerized products of all types, and how their prices have come down over the years: this is what is supposed to happen, generally speaking, for all goods and services over time, as production methods, efficiency and rational allocation through the price mechanism beneficially impact the economic calculations of market participants.

Basically, we get better at making stuff, and so stuff gets cheaper—when the value of currency is held static. The process of rectifying the current inflated supply of currency and credit and its impacts are detailed by Hülsmann in Deflation and Liberty (audiobook):

In a very dramatic deflation, there is much less money around than there used to be, and thus we cannot sell our products and services at the same money prices as before. But our tools, our machines, the streets, the cars and trucks, our crops and our food supplies—all this is still in place. And thus we can go on producing, and even producing profitably, because profit does not depend on the level of money prices at which we sell, but on the difference between the prices at which we sell and the prices at which we buy. In a deflation, both sets of prices drop, and as a consequence for-profit production can go on.

This is why the propagandists’ so greatly fear deflation; or, as ex-Federal Reserve Chairman Alan Greenspan said on the topic of ending inflation: “One has no difficulty in understanding the statists' antagonism toward the gold standard.”

There is only one fundamental change that deflation brings about. It radically modifies the structure of ownership. Firms financed per credits go bankrupt because at the lower level of prices they can no longer pay back the credits they had incurred without anticipating the deflation.

Yet it is from that very “creative destruction” that the seeds of healthy recovery emerge and new sustainable growth is planted.

The point is that other people will run the firms and own the houses—people who at the time the deflation set in were out of debt and had cash in their hands to buy firms and real estate. These new owners can run the firms profitably at the much lower level of selling prices because they bought the stock, and will buy other factors of production, at lower prices, too.

The idea that you have lived a grand rip-off is very real. You have missed out on a lifetime of generally falling prices, as is evident from the declining purchasing power of the Federal Reserve (Fed’s) paper dollar. But, unfortunately, the news gets worse: the missed opportunities go beyond the sad state of the once-mighty dollar. With real prices, and without the constant siphoning-off of wealth by the owners of the system, society would have utilized the resources stolen by this socialist redistribution system to create advancements we can only imagine.

We as a society need to return to a free market system in which prices to loan money (interest rate) is set in the market by the participants, and assets of all types are valued in unimpeded capital markets. Deflation is to be feared by those in the 1% who “can understand the system” and who are parasitically “interested in its profits.” But deflation should logically be embraced by the 99% because our purpose is to maintain and—where necessary—to restore, a free society. Therefore, deflation is the only acceptable monetary policy.

But this policy need not be administered or regulated, because after the Fed is gone (as happened to the first two central banks before it created to feed on these united States), absolutely nothing will or should take its place, as Gary North reminds us in How to End the Fed, and How Not To. The market interest rate and the market supply of money is the optimal outcome. The hubris-driven pretense of omniscience is an embarrassment to civilization itself that logic and historical trial and error refuted long ago. Greed and fear determine the meaning of speculation and deflation as defined in the lamestream media. Educate your friends and family, and “like” us lots.

Excellent article, congratulations!

that was the best explanation of deflation i have ever read,i have been searching for the difference between inflation and delation,I did not learn this is economics 101 at northeastern univ. Thanks so much

I LOVE Deflation. In fact, deflation should become so contagious that we elect politicians who love it also.

Yes Deflation & Liberty. Best audio to commute with on repeat, been there. :)

Click on the images for full-size from here on forward ! !

testiomials Deflation is a “decrease in the supply of money”; price deflation is the natural blessing that follows. Everybody loves lower prices, which result in a higher standard of living. If we could only for once and for all kick those who promote currency debasement to the curb, we would enjoy lower prices and higher living standards as the natural order of a true free market society.”

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