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

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

“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]

Environments that allow for hoarding

For the act of hoarding to occur, certain conditions must be met to allow speculators to successfully manipulate of the price of goods. The main condition granting the ability for speculators to manipulate prices is that the goods being hoarded belong to a non-competitive market. A non-competitive market occurs when the agents acting in the marketplace of question are limited, have little or weak competition, and are not controlled entirely by market forces, unlike markets which operate under

Hoarding behavior is a common response to fear, whether fear of imminent societal collapse or a simple fear of a shortage of some good. Civil unrest or natural disasters may lead people to collect foodstuffs, water, gasoline, generators, and other essentials which they believe, rightly or wrongly, may soon be in short supply. There is often an implication that hoarding occurs because individuals do not believe that the market will operate efficiently in current or expected conditions.

Market implications of hoarding

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]

Government regulation

Not all hoarding is illegal; legal prohibitions often target behavior that could destabilize a market. A common procedure used to prevent speculators intending to hoard commodities is implementing price controls, in which limitations on the price that can be charged for a good or service is enforced.^[8] Price controls intend to maintain the affordability of a product even in times of scarcity, limiting the extent to which a products price can increase, hence constraining the potential profit generated from economic hoarding acts.^[18] Governments may also create agencies to monitor entities for hoarding behaviours, such as the Securities and Exchange Commission in the U.S., responsible for identifying and tracking potential speculators storing excessive commodities with intentions of manipulating a marketplace.^[19]

However, it is often difficult for regulators to distinguish when an act of hoarding is provoked by the intention to manipulate prices or by fearfulness of future events. Additionally, in some instances government intervention may lead to further instability in the market. The price limit set for products in price control roll outs are often lower than the predominant market price, which may result in suppliers being unwilling to sell their products. The subsequent decrease in supply will tend to an increase in demand, which can lead to the formation of underground markets where the product is illegally sold for a higher price.^[20][2]

Price gouging is typically illegal, often defined by raising the prices of necessary goods after the declaration of a state of emergency.

Prohibition of hoarding in Islamic jurisprudence

The practice of economic hoarding and price gouging is prohibited in

Seyed Kazem Sadr, a professor of Islamic finance,[27] highlights the different levels of extremity regarding hoarding practices in his book “Handbook of Ethics of Islamic Economics and Finance”.^[25] Sadr defines such levels in phases. In the first phase, the act of hoarding is non-speculative, rather the agent hoarding the good has no intentions to affect the price nor supply of the good being stockpiled and are simply collecting such goods to maintain their livelihood. In the second phase, agents stockpile products that are easily accessible and abundant in the market. Although the good is not being stored for immediate use, if the good is easily accessible such stockpiling activities will not negatively impact the price nor supply of the good and therefore is viewed as saving rather than hoarding in Islamic jurisprudence.^[28] In the third phase, the practice of hoarding causes the price of a good to increase, although is still available in the market. With intentions to create shortages and influence prices, the third phase of hoarding is considered unethical under Islamic jurisprudence as consumers may be burdened by having to pay for products at a greater price and possibly having to go to greater efforts to source products they may need. In these cases, the government has the authority to seize and auction off the hoarded goods to consumers.^[29][2] In the fourth and final phase, the practice of hoarding is deemed to be extremely harmful as the goods being hoarded become scarce and inaccessible, causing extensive adverse effects on the stability of the economy. With consumers struggling to obtain the goods required to maintain their livelihoods, society becomes vulnerable to collapse, hence such instances of hoarding are ‘haram’, meaning forbidden by Islamic law.^[23]

Examples of hoarding

Silver Thursday

Silver price history in 1960–2020 showing the Silver Thursday event in 1980
Convicted	Nelson Bunker Hunt, William Herbert Hunt and Lamar Hunt
Verdict	Found guilty of violating fraud, commodities and antitrust laws
Sentence	lifetime bans from trading in commodities futures and a $10m penalty

Silver Thursday

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.

Price gouging during the Covid-19 pandemic

Comparable to hoarding practices,

A feature of hoarding is that it leads to an inefficient distribution of scarce resources, making the scarcity even more of a problem. An example occurs in cities where parking is inadequate. In such a case, businesses may post signs indicating that their lot is for their employees and customers only, and all other vehicles will be towed. This prevents businesses from allowing their parking to overflow into neighboring lots when their capacity is exceeded. Thus, when the capacity is reached at one business, there may be no legal place to park, while there would have been, if hoarding had not occurred. If a single business posted those signs, it would, indeed, improve the parking situation at that business, as they could continue to park at adjacent businesses, while the others could not park in their lot. However, when everybody posts such signs, the problem becomes worse for everyone. (This example assumes all of the lots are sometimes inadequate for their businesses; in a case where a business has sufficient parking for itself, but its lot is filled with customers from others, the signs would be beneficial to that business, even if others did the same.)[36]

See also

• Artificial scarcity
• Cornering the market
• Crisis in Venezuela
• Currency crisis
• Dishoarding
• Gresham's law
• Greed vs Fear Index
• Investing
• Land banking
• Panic buying
• Price gouging
• Survivalism
• Societal collapse

References