Hoarding (economics)
Hoarding in economics refers to the concept of purchasing and storing a large amount of product belonging to a particular market, creating scarcity of that product, and ultimately driving the price of that product up. Commonly hoarded products include assets such as money, gold and public securities,[1] as well as vital goods such as fuel and medicine.[2] Consumers are primarily hoarding resources so that they can maintain their current consumption rate in the event of a shortage (real or perceived).[3] Hoarding resources can prevent or slow products or commodities from traveling through the economy.[4] Subsequently, this may cause the product or commodity to become scarce, causing the value of the resource to rise.
A common intention of economic hoarding is to generate a profit by selling the product once the price has increased. Hence, economic speculators tend to hoard products that are inelastic in price so that when the price of the product does increase, the demand for that product is maintained.[5][2] Unlike investing, hoarded goods are excluded from an economy’s flow of money[6] and generally occurs in markets operating under a non-competitive structure.[7] The practice of hoarding can have varied effects in the economy and is legal in most cases, however price controls and other regulatory laws are often enforced to prevent negative market implications.[8] Under Islamic jurisprudence, intentional acts of economic hoarding are regarded as a highly sinful and unlawful.[2]
Artificial scarcity[edit]
The term "hoarding" may include the practice of obtaining and holding resources to create artificial scarcity, thus reducing the supply, thereby increasing the price, so that resource can be sold for profit. Artificial scarcity may also be used to help corner a market, by reducing competition via the creation of a barrier to entry. This reduction in competition could allow a monopoly or oligopoly to form.[9]
Hoarding versus investing[edit]
Investing refers to the act of temporarily allocating funds in an entity such as stocks, property, and other financial schemes with the intention of generating a profit as the value of the investment appreciates over time.[6] Unlike investing, which commonly involves providing corporations with money to be spent on manufacturing goods and services, hoarded stockpiles are not active in the economy. Economist Mathias Binswanger[10] classifies economic hoarding as the resources that are withdrawn from and not reinjected into the circular flow of money, being all the money flows that are connected to active events occurring in the economy. Hoarding and investing can be made distinguishable by the notion that investing produces resources of value within the economy, whereas hoarding suspends resources of value from being active in the economy. Economist Seyed Sadr differentiates between the speculative intentions of hoarding and general intentions of investing using the following criteria:
“If the market share price of a unit of investment in a project is higher than the production and marketing cost of that unit, the share should be offered for sale. If it is held off the market to create artificial scarcity of the shares, the behaviour is speculative in nature.”[2]
Market implications of hoarding[edit]
Hoarding can theoretically provoke the arising of a non-consumption economy, as the products being hoarded by speculators are not available or too expensive for potential consumers to benefit from.[14][15] If the producer or industry that manufactures a product has a low long-term responsiveness to changes in demand, economic hoarding is likely to cause demand to sharply increase, as producers are unable to produce enough units of said product to recover it from a state of scarcity due to its low elasticity of supply. As demand for the product increases, the products value increases, often resulting in accelerated inflation.[3][16] Resultantly, economic hoarding is often considered to be detrimental as it can isolate commodities from the economy.
Due to the complexity of the economy and the flows of resources occurring within it, critics argue that the effect economic hoarding has on the economy is abstracted and the results of economic hoarding can be highly varied. In some instances, where the profit generated from the act of hoarding is reinjected into the economy, the economy may benefit from economic growth that the act of economic hoarding has provided. Conversely, economic hoarding may compromise the initiative to invest in active agents in the economy, especially when the hoarded asset promises higher returns, resulting in reduced economic growth.[10]
Similarly, hoarding money in savings can theoretically both benefit and disadvantage the economy. While there is low risk of currency oversupply and accelerated inflation when hoarding money, financial hoarding may distort the value of assets and commodities and intensify the risk of losing money in investments or business ventures, as less money circulates through active economic instruments such listed companies.[17]
Convicted
Found guilty of violating fraud, commodities and antitrust laws
lifetime bans from trading in commodities futures and a $10m penalty
Examples of hoarding[edit]
Silver Thursday[edit]
There have been many instances of economic hoarding throughout history, with an example being the silver collapse of 1980, coined ‘Silver Thursday’.[30] In this case, brothers Herbert and Nelson Hunt speculated that inflation would result in the value of paper currency to diminish, whilst metal assets, such as silver would maintain value and subsequently face an increase in demand. The brothers began to bulk purchase silver, including physical silver and future contracts that would allow them to buy or sell silver at a predetermined price, accumulating an estimated 100 million ounces of precious metals.[31] By 1980, this hoarding event resulted in silver prices spiking to 50 U.S. dollars per ounce from the original 1.50 U.S dollars per ounce the Hunt brothers had paid for 10 years prior. Ensuing this surge in silver prices, the Federal Reserve intervened, suspending all trades in silver and ultimately resulting in the market crashing on March 27, 1980, when silver stock prices plummeted back down to $10.80 U.S dollars per ounce.