The Dispersion of Expectations in a Speculative Market

It may be assumed with some plausibility that the participants in a speculative market — for example, a market for bonds or for foreign exchange, more generally, a market where the participants are interested in future appreciation or depreciation — have different expectations with regard to the future price, or the direction in which prices are going to change. Contrary to some opinions, this diversity of expectations is a condition for the attainment and maintenance of equilibrium in these markets; it must be fulfilled in order to assure that an additional offer coming from outside will find buyers or that an additional demand coming from outside will will find sellers. A further condition is that there must be a generally accepted idea of a normal price level to which prices ultimately tend to return. This normal price will be a range of prices rather than one single price. Though the estimate of this range of prices may not be uniform either, it is much more uniform than the earlier mentioned price expectations: it must have some basis in objective facts. Thus in the case of a manufactured good there may be some general information about the range of costs. In the case of an exchange rate there is — or at least there used to be — an idea about purchasing power parity or relative cost, although in our times this has obviously become more and more an obscure and irrelevant quantity.