Background and Context
The Challenge of Measuring Speculation
Speculation—buying and selling assets solely for capital gains—has long been thought to destabilize economies, but has never been systematically measured at the macroeconomic level over long periods.
Novel Text-Based Methodology
The researchers analyzed 640 million words from 1.2 million business articles in The Times newspaper (1785-2019) to create a monthly speculation index based on how often speculation-related words appeared.
Why The Times Newspaper?
The Times was chosen because it is the UK's oldest quality daily newspaper with continuous publication since 1785, and its business coverage has historically been impartial rather than promotional.
Four Distinct Epochs of Speculation in the UK (1785-2019)
- The speculation index reveals four distinct periods, each shaped by different regulatory and economic environments.
- The highest speculation occurred during 1825-1890, coinciding with railway manias and corporate law liberalization.
- Financial repression during two World Wars suppressed speculation from 1890 to 1967 as government prioritized debt financing.
- Deregulation from the 1960s onwards steadily increased speculation until the 2007-08 Global Financial Crisis.
High Speculation Years Show Stronger Economic Growth and Lower Government Debt
- Years with high speculation are associated with substantially higher preceding economic growth across all time horizons.
- The debt-to-GDP ratio is dramatically lower in high speculation years (77%) versus low speculation years (161%).
- This suggests governments use financial repression during high-debt periods, which crowds out speculative activity.
Low Interest Rates Lead to Higher Speculation After 33 Months
- The chart shows the cumulative effect of past discount rate changes on current speculation levels.
- Initially positive values suggest reverse causality: authorities raise rates when speculation is high.
- After 33 months, the negative effect becomes statistically significant—sustained low rates increase speculation over time.
- This gradual effect suggests behavioral factors like "reaching for yield" develop slowly rather than instantly.
High Government Debt Triggers Financial Repression, Suppressing Speculation
- When government debt is high, authorities implement financial repression to ensure debt financing at low cost.
- Financial repression includes capital controls, bank lending restrictions, and forcing institutions to hold government bonds.
- These policies restrict the availability of credit for speculation and limit market activity overall.
- This explains why speculation was low during WWI, WWII, and the interwar period despite developed financial markets.
Banking Crises Are Preceded by Higher and Rising Speculation
- Banking crisis years show significantly higher speculation levels (1.92) compared to non-crisis years (1.31).
- The five-year change in speculation before crisis years (0.19) is much higher than non-crisis years (0.04).
- Speculation declines in the actual crisis year, confirming that crises come after the speculative boom ends.
- This pattern supports the view that prolonged speculation contributes to financial instability with a lag.
Contribution and Implications
- This is the first long-run macroeconomic measure of speculation, enabling systematic study of its causes and consequences.
- The research demonstrates that speculation is not purely behavioral but has deep political, monetary, and fiscal roots.
- Policymakers should monitor speculation levels as part of financial stability frameworks, particularly during low interest rate periods.
- The methodology using newspaper text analysis can be replicated for other countries with long-running quality newspapers.
- Historical evidence suggests that financial repression, while suppressing speculation, also prevents banking crises from occurring.
Data Sources
- Four Epochs SVG: Based on Figure 3 (Monthly Speculation Index) and narrative analysis in Section III of the article.
- Economic Conditions Chart: Data from Table 1, Panels D (Top Quartile Speculation Years) and E (Bottom Quartile Speculation Years), showing GDP growth rates and debt-to-GDP ratios.
- Discount Rate Effects Chart: Data from Table 2 (Cumulative Relationship between Past Discount Rate Changes and Speculation), showing cumulative effect sizes at selected lag months.
- Debt-Speculation Mechanism SVG: Based on qualitative analysis in Section III and Figure 4 (Speculation vs National Debt/GDP).
- Banking Crisis Chart: Data from Table 3, Panel B (comparing crisis vs non-crisis years) for speculation index levels and changes.
Infographics by Topic
