It's simpler: people who were long oil make money (on paper) and those who were short oil lose money (on paper).
You were long oil if you are an oil producer, or, e.g., if you owned oil futures. You were short oil if you are an oil consumer, or, e.g., if you had sold oil futures. If you are both (e.g., airlines might hedge future oil consumption by buying futures, and producers might hedge future production by selling away their future production), then you need to net it out across the futures curve.
Price responses to supply shocks in theory serve to allocate resources appropriately (e.g., if your consumption did not matter that much, you might curtail it); if another person's consumption is more productive (i.e. profitable), then they're likely to eat the input cost and still buy it. In the long run, you might hope that high prices lead to more investment in producing the scarce good, or in more hedging activity to prevent future harms. The net effect of (long) hedging activity is generally to slightly increase the future price because folks buy futures / futures options, and market makers, in addition to selling the option, buy the underlying to remain market neutral. This potentially increases future supply because it can, in theory, push up the futures price, or estimates of future price, which can make new resource extraction economical.
Unfortunately, today, given the degree of inequality, it is mostly poor people whose consumption is curtailed when there are supply shocks. This is consistent with the above interpretation: the implication of wealth inequality is that the poor people matter less and are less productive to the capitalist machine. As a real example of this, the oil price would likely be higher even, if the oil consumption of Southeast Asian countries had not decreased because they could not afford the higher prices. This is the great thing about inflation in a highly unequal society: it is partially tempered because demand goes away as prices rise.
Or, in another world, the official US CPI definition (<a href="https://www.bls.gov/cpi/" rel="nofollow">https://www.bls.gov/cpi/) is 16.3% based on energy prices.
I strongly suspect this definition strongly correlates with what most people call inflation (my fuel bill went up! and strangely, not heading to work wasn't really an option).
If everything has an oil component to its price i.e. energy to produce it or transportation to move it, a (large) price increase in one commodity would produce a general price increase.
Almost as if currency should be backed by a rare commodity that requires the same stuff that causes inflation to increase supply.
If printing value-free money wasn't how we are ruled, we could even come up with a diversified scheme where an alchemist could discover a way of turning silicon into gold and it wouldn’t affect the economy much.
But not that 16% level. If the cost of a good is 10% oil then it will increase 1.6% from the oil price.
People seem to have very odd views on inflation. “Eggs have doubled in price therefore real inflation is 100%”
The basket of goods and different figures are all there, build your own basket if you want and come out with your own inflation level. Don’t just gut feeling it.
Now there are legitimate issues — if the cost of 1kg of pasta hasn’t changed, but it is no longer available int he shops near you, then that’s a problem.
> a (large) price increase in one commodity would produce a general price increase.
Nope. Because if you spend more on one commodity, you necessarily spend less on other items. Spending less means less demand, and corresponding price reductions.
This is the Law of Supply and Demand at work.
Which also explains inflation - more money dumped into the economy, without a corresponding increase in the goods & services in the economy, devalues the money (see Law of Supply and Demand), which we call "inflation".
Money is not "special", and is subject to the LoSaD just like everything else.
Look what happened to Beanie Babies' prices when Tyco flooded the market with them. What do you think would happen to the price of Ferraris if Ferrari quadrupled production?
Why do you think Argentina's inflation is way down? It's the reduction in deficit spending. Do you think the Weimar Republic's trillion-to-one was caused by oil prices?
> Inflation is the result of devaluing the currency by creating money (i.e. deficit spending).
Though I agree that printing new money causes inflation (not all economists agree!), inflation does not have to be the result of new money creation. Shifts in behavior can lead to short term changes in price levels. All inflation is measured relative to a basket of goods. If prefs change for diff goods, then price levels (and thus inflation) can change.
> Oil prices do not cause inflation.
This is probably not true in the short term. If the input costs for everything go up, then price levels change, and the CPI basket likely changes (up).
If we more reasonably measured inflation as some notion of quality of life, then increases in energy prices (which factor into everything) would definitely reduce per capita material well-being.
> Increases in the price of X cause the demand for X to drop, as people shift their spending elsewhere.
My point is that if you have a collection of people who can just barely afford something, and the price of that thing goes up just a little, those people will not be able to buy it. A person who gets priced out of participating in society (and, e.g., dies) contributes nothing to inflation. On the other hand, folks who have some capacity to adjust their consumption or who have a savings /capital buffer, may be able to reallocate funds to the purchase of oil (or other goods whose prices are increasing). This can lead to a further rise in the price of goods (hence, inflation).
If you print $100 trillion in dollar bills and buried it on a moon of the solar system, inflation won’t be affected at all.
Printing doesn’t cause inflation, releasing it into the economy does. Giving it all to one person in a Brewster millions challenge is unlikely to, as they aren’t going to be able to spend much.
Gold didn't cause inflation while it sat in the ground, either. But the US experienced significant inflation during the California gold rush and the Alaska gold rush, as the gold flooded into the economy.
People on HN really want to believe this because they tend to be hard-money weirdos of various kinds, but no: commodity price rises are inflation.
> Increases in the price of X cause the demand for X to drop
There has been a lot of "demand destruction", but because oil is an intermediate input to so many things, especially anything that requires transporting, what actually happens is it forces up the overall price level.
> The only way to get a general price increase is to increase the money supply.
Deficit spending isn't the only way to increase the money supply. Lowering interest rates and increasing loans is another.
People go into debt to pay for expenses and necessities.
In fact here's a simplified model: oil prices increase, oil stocks go up, shareholders borrow against them and pay for gasoline. No government deficits were created but the money supply increased due to oil prices going up.
When you borrow money, the money is "created" by an entry in the ledger, in exchange for the collateral. When you pay it back the creation is reversed, and the collateral is returned.
The same thing happens when you write a check. You create money by writing the check. When the check is cashed, the money is transferred, and the check is no longer valid.
Ok the Socratic method is going to take too long. I'll just explain.
> When you borrow money, the money is "created" by an entry in the ledger, in exchange for the collateral. When you pay it back the creation is reversed, and the collateral is returned.
You're describing a bank loan. I asked about the federal deficit.
Technically the "deficit" is the amount the government spends that's greater than the tax it collects. The federal deficit is funded by federal debt, which is funded by bonds sold by the US Treasury. [1] The federal debt is the thing that is paid back, not the "deficit".
This debt is purchased by many entities, public and private, foreign and domestic. Among all these entities, only the Federal Reserve can actually reduce money supply (in US dollars) when it gets paid back the money it lent to the Treasury.
The Fed holds about 16% of all Treasuries. [2]
The Fed's treasuries are 20% of the total money supply (M2).[4]
To a first approximation paying back the "deficit" (actually federal debt) would only reduce the money supply, and therefore prices due to higher money supply, between 16-20%.
But according to the BLS, prices are up 29% since 2020.[3] And of course, diesel and gasoline are up by a lot more than that.
Tl;dr blaming "the deficit" for inflation is reductive and incomplete.
My opinion: productivity increases and technological progress.
If you own a factory that could previously produce 100 shirts every and sell them for $10 apiece, and now it makes 1000 shirts daily and can still sell them for $5 each, the factory is worth 5 times more than it was. That "value" was created by the hard work and ingenuity of the factory owners, managers, and workers.
The factory owner's bank is willing to lend more money to the owner to expand the business. With higher revenues for the factory, the workers can demand higher pay, given the right labor market. That means they can borrow more money to buy a house or car. And so on.
Money represents value. If your economy produces more value, it has more money (or is worth more money). If it has more money, people in the economy are able to spend more money on things. Therefore: inflation.
> Money represents value. If your economy produces more value, it has more money (or is worth more money). If it has more money, people in the economy are able to spend more money on things. Therefore: inflation.
You are correct that creating value can be used as collateral for a loan of created money. When the loan is paid off, however, the money is destroyed. The books balance. Hence, it does not cause inflation.
> When the loan is paid off, however, the money is destroyed
Well no. Now the bank has more money than it had before. That's profit. It's reinvested into the business (more loans), or paid out to shareholders who will further invest it.
> Adding 20% to x and then subtracting 20% does not produce the same value, it produces .96*x.
Good point, but that's worse for your argument. Prices would drop even less than 20% even if the Fed destroyed all the money that it is able to.
> Your theory does not explain why the US had zero net inflation from 1800 to 1914
Less easy access to consumer credit. Fewer shortages of essentials. Less things for people to spend money on; everyone consumed less than today. Ever-increasing supply of land and housing as the country expanded to the west coast. Ample labor because of essentially open borders (only to Europeans). Less productivity growth. Like I already said: inflation has many causes.
> You're just throwing things out to see if anything sticks.
You're a smarter guy than me. I don't know how many times I have to say "Inflation can have many causes, often simultaneously". I'm sorry but you don't have an open mind.
> Why was there massive inflation in the years before the Constitution was adopted
I don't know. No Federal Reserve to blame for sure.
> Why was there massive inflation in the Confederacy?
Supply shortages in a wartime economy. Low confidence in the Confederate government, and therefore its currency.
> Why was there inflation during the California and Yukon gold rushes?
In California or in the country generally? In California I'd guess it's because a lot of people moved to an undeveloped place in a very short period of time. They all needed housing, clothing, equipment, and food, and consequently there was a temporary supply shortage. Some people struck gold (new wealth), so they could pay for the things they wanted.
> Few things increased productivity more than the cotton gin.
And that increased the value of farmland in the South, didn't it? The owners had more money than they did before. So are you claiming the South actually did have inflation at the time, or that it did not?
> What happened in 1914 that changed it all?
Many things happened. For instance, WW1 began. Wars reduce trade and drive up demand for fuel and other raw materials.
A few years earlier in 1907 the US passed the first of a series of acts to reduce immigration (there were updates passed in 1917, 1921, and 1924). That reduced labor supply. Also by that time in history the US had expanded all the way to the west coast. There was no new frontier to send excess people out to develop.
The US mortgage industry began in the 1870s.[1] That is probably the beginning of widespread consumer credit.
I know for you all that matters is "The Federal Reserve started in 1914". Like I said, you're unwilling to learn something new.
> Increases in the price of X cause the demand for X to drop, as people shift their spending elsewhere.
Elasticity of goods has entered the chat. If a significant amount of inelastic goods' price increase, cue inflation. Energy costs, especially fuel, are classic drivers of inflating prices.
> Energy costs, especially fuel, are classic drivers of inflating prices.
That's what politicians want you to believe ("Putin's price hike"), to divert attention from the real cause, massive deficits, which are the fault of the politicians.
BTW, Rockefeller dropped the price of kerosene by 70%. Why was there no deflation?
Many things can cause inflation. The definition of inflation is "when prices go up, on average." One thing that can cause inflation is bombing your own supply lines for an essential commodity that's an ingredient in almost all goods and services, so that there's a shortage of almost all goods and services, raising their prices until demand shrinks to meet the constricted supply.
Oil is an input cost to everything, if the price of oil goes up, so does everything else. Some forms of demand are inelastic, which means people will continue hitting the rising ask as prices go up. Commodity prices going up definitely causes inflation.
Producing oil is different from having a long position in oil itself, or oil futures. I'm not saying this to be pedantic, cause long is already a technical term.
It’s a good job you’re not saying it to be pedantic, because it is certainly incorrect. If you produce oil you are long spot oil (from your inventory available for delivery) and you are long future oil as well (from your proven reserves and inventory in transit and refining). It is different in that you long in the cash market and are long your specific grade of oil (which is not precisely identical to that on the futures contracts) but you’re still long.
Note that the amounts of money involved here are not equal, companies respond to price movements and expected price volatility with less efficient behavior, so the volatility itself causes economic losses.
Like, there's a trade you can do where you load up an actual tanker with oil, park it, and sell an option to buy that oil. The cost of using this tanker and holding this oil a pure waste compared to just having a market-clearing quantity available at a consistent price at all times, but if the market is scared enough it makes money.
That trade works when the market is in steep carry, usually a result of depressed prices.
That trade does not work today when the market is very inverted: you buy the spot oil, and sell a call in the future. But the term structure is pricing lower oil prices in the future. You take that hit on your spot cargo.
That trade only works if you are bearish the curve and bullish flat price. And if you have this view, it's just about the worst possible way to structure that trade.
The cure for high prices is high prices. Curve inversion ensures that anyone with oil today is incentivized to sell it asap.
The point is that the most efficient ways to physically handle oil products happens when prices are stable and predictable. I could have just as easily talked about the expenses involved in keeping a profitable-only-at-higher-price field on operational standby as a real option on oil prices, or increased shipping costs as localized price changes shuffle trade routes, etc.
jsrozner · · focus · HN ↗
You were long oil if you are an oil producer, or, e.g., if you owned oil futures. You were short oil if you are an oil consumer, or, e.g., if you had sold oil futures. If you are both (e.g., airlines might hedge future oil consumption by buying futures, and producers might hedge future production by selling away their future production), then you need to net it out across the futures curve.
Price responses to supply shocks in theory serve to allocate resources appropriately (e.g., if your consumption did not matter that much, you might curtail it); if another person's consumption is more productive (i.e. profitable), then they're likely to eat the input cost and still buy it. In the long run, you might hope that high prices lead to more investment in producing the scarce good, or in more hedging activity to prevent future harms. The net effect of (long) hedging activity is generally to slightly increase the future price because folks buy futures / futures options, and market makers, in addition to selling the option, buy the underlying to remain market neutral. This potentially increases future supply because it can, in theory, push up the futures price, or estimates of future price, which can make new resource extraction economical.
Unfortunately, today, given the degree of inequality, it is mostly poor people whose consumption is curtailed when there are supply shocks. This is consistent with the above interpretation: the implication of wealth inequality is that the poor people matter less and are less productive to the capitalist machine. As a real example of this, the oil price would likely be higher even, if the oil consumption of Southeast Asian countries had not decreased because they could not afford the higher prices. This is the great thing about inflation in a highly unequal society: it is partially tempered because demand goes away as prices rise.
WalterBright · · focus · HN ↗
Inflation is the result of devaluing the currency by creating money (i.e. deficit spending).
Oil prices do not cause inflation. Increases in the price of X cause the demand for X to drop, as people shift their spending elsewhere.
davidgay · · focus · HN ↗
I strongly suspect this definition strongly correlates with what most people call inflation (my fuel bill went up! and strangely, not heading to work wasn't really an option).
WalterBright · · focus · HN ↗
blitzar · · focus · HN ↗
avadodin · · focus · HN ↗
If printing value-free money wasn't how we are ruled, we could even come up with a diversified scheme where an alchemist could discover a way of turning silicon into gold and it wouldn’t affect the economy much.
hdgvhicv · · focus · HN ↗
People seem to have very odd views on inflation. “Eggs have doubled in price therefore real inflation is 100%”
The basket of goods and different figures are all there, build your own basket if you want and come out with your own inflation level. Don’t just gut feeling it.
Now there are legitimate issues — if the cost of 1kg of pasta hasn’t changed, but it is no longer available int he shops near you, then that’s a problem.
WalterBright · · focus · HN ↗
Nope. Because if you spend more on one commodity, you necessarily spend less on other items. Spending less means less demand, and corresponding price reductions.
This is the Law of Supply and Demand at work.
Which also explains inflation - more money dumped into the economy, without a corresponding increase in the goods & services in the economy, devalues the money (see Law of Supply and Demand), which we call "inflation".
Money is not "special", and is subject to the LoSaD just like everything else.
Look what happened to Beanie Babies' prices when Tyco flooded the market with them. What do you think would happen to the price of Ferraris if Ferrari quadrupled production?
Why do you think Argentina's inflation is way down? It's the reduction in deficit spending. Do you think the Weimar Republic's trillion-to-one was caused by oil prices?
jsrozner · · focus · HN ↗
Though I agree that printing new money causes inflation (not all economists agree!), inflation does not have to be the result of new money creation. Shifts in behavior can lead to short term changes in price levels. All inflation is measured relative to a basket of goods. If prefs change for diff goods, then price levels (and thus inflation) can change.
> Oil prices do not cause inflation. This is probably not true in the short term. If the input costs for everything go up, then price levels change, and the CPI basket likely changes (up).
If we more reasonably measured inflation as some notion of quality of life, then increases in energy prices (which factor into everything) would definitely reduce per capita material well-being.
> Increases in the price of X cause the demand for X to drop, as people shift their spending elsewhere. My point is that if you have a collection of people who can just barely afford something, and the price of that thing goes up just a little, those people will not be able to buy it. A person who gets priced out of participating in society (and, e.g., dies) contributes nothing to inflation. On the other hand, folks who have some capacity to adjust their consumption or who have a savings /capital buffer, may be able to reallocate funds to the purchase of oil (or other goods whose prices are increasing). This can lead to a further rise in the price of goods (hence, inflation).
hdgvhicv · · focus · HN ↗
Printing doesn’t cause inflation, releasing it into the economy does. Giving it all to one person in a Brewster millions challenge is unlikely to, as they aren’t going to be able to spend much.
jsrozner · · focus · HN ↗
hdgvhicv · · focus · HN ↗
If land prices go up from 10t to 20t it’s not available for circulation.
On the other hand taking out a loan doesn’t “print money” but does add money to circulate
WalterBright · · focus · HN ↗
pjc50 · · focus · HN ↗
> Increases in the price of X cause the demand for X to drop
There has been a lot of "demand destruction", but because oil is an intermediate input to so many things, especially anything that requires transporting, what actually happens is it forces up the overall price level.
WalterBright · · focus · HN ↗
It's simply following the facts and the history of inflation in economies.
If oil forces up prices, that means people have less money to spend on other things, which reduces demand for them, which reduces prices.
The only way to get a general price increase is to increase the money supply.
Inflation numbers track the deficits, with a lag of about 13 months.
And when was the last time oil price reductions caused deflation?
triceratops · · focus · HN ↗
Deficit spending isn't the only way to increase the money supply. Lowering interest rates and increasing loans is another.
People go into debt to pay for expenses and necessities.
In fact here's a simplified model: oil prices increase, oil stocks go up, shareholders borrow against them and pay for gasoline. No government deficits were created but the money supply increased due to oil prices going up.
WalterBright · · focus · HN ↗
The federal deficit, however, is not being paid back, and so the increase in the money supply causes inflation.
triceratops · · focus · HN ↗
WalterBright · · focus · HN ↗
triceratops · · focus · HN ↗
WalterBright · · focus · HN ↗
The same thing happens when you write a check. You create money by writing the check. When the check is cashed, the money is transferred, and the check is no longer valid.
Same with using a credit card.
triceratops · · focus · HN ↗
> When you borrow money, the money is "created" by an entry in the ledger, in exchange for the collateral. When you pay it back the creation is reversed, and the collateral is returned.
You're describing a bank loan. I asked about the federal deficit.
Technically the "deficit" is the amount the government spends that's greater than the tax it collects. The federal deficit is funded by federal debt, which is funded by bonds sold by the US Treasury. [1] The federal debt is the thing that is paid back, not the "deficit".
This debt is purchased by many entities, public and private, foreign and domestic. Among all these entities, only the Federal Reserve can actually reduce money supply (in US dollars) when it gets paid back the money it lent to the Treasury.
The Fed holds about 16% of all Treasuries. [2]
The Fed's treasuries are 20% of the total money supply (M2).[4]
To a first approximation paying back the "deficit" (actually federal debt) would only reduce the money supply, and therefore prices due to higher money supply, between 16-20%.
But according to the BLS, prices are up 29% since 2020.[3] And of course, diesel and gasoline are up by a lot more than that.
Tl;dr blaming "the deficit" for inflation is reductive and incomplete.
1. <a href="https://www.pgpf.org/article/debt-vs-deficits-whats-the-difference/" rel="nofollow">https://www.pgpf.org/article/debt-vs-deficits-whats-the-diff...
2. <a href="https://www.pgpf.org/article/the-federal-government-has-borrowed-trillions-but-who-owns-all-that-debt/" rel="nofollow">https://www.pgpf.org/article/the-federal-government-has-borr...
3. <a href="https://www.bls.gov/data/inflation_calculator.htm" rel="nofollow">https://www.bls.gov/data/inflation_calculator.htm
4. <a href="https://fred.stlouisfed.org/release/tables?eid=1217588&rid=21" rel="nofollow">https://fred.stlouisfed.org/release/tables?eid=1217588&rid=2...
WalterBright · · focus · HN ↗
The measure of inflation is a hack, and depends on what "basket of goods" is used by BLS.
Inflation tends to have a 13 month lag to the changes in the money supply.
Money flooding the economy does not spread out evenly.
Your theory does not explain why the US had zero net inflation from 1800 to 1914, and 30:1 inflation since. Mine does.
WalterBright · · focus · HN ↗
triceratops · · focus · HN ↗
If you own a factory that could previously produce 100 shirts every and sell them for $10 apiece, and now it makes 1000 shirts daily and can still sell them for $5 each, the factory is worth 5 times more than it was. That "value" was created by the hard work and ingenuity of the factory owners, managers, and workers.
The factory owner's bank is willing to lend more money to the owner to expand the business. With higher revenues for the factory, the workers can demand higher pay, given the right labor market. That means they can borrow more money to buy a house or car. And so on.
Money represents value. If your economy produces more value, it has more money (or is worth more money). If it has more money, people in the economy are able to spend more money on things. Therefore: inflation.
WalterBright · · focus · HN ↗
You are correct that creating value can be used as collateral for a loan of created money. When the loan is paid off, however, the money is destroyed. The books balance. Hence, it does not cause inflation.
triceratops · · focus · HN ↗
Well no. Now the bank has more money than it had before. That's profit. It's reinvested into the business (more loans), or paid out to shareholders who will further invest it.
triceratops · · focus · HN ↗
Good point, but that's worse for your argument. Prices would drop even less than 20% even if the Fed destroyed all the money that it is able to.
> Your theory does not explain why the US had zero net inflation from 1800 to 1914
Less easy access to consumer credit. Fewer shortages of essentials. Less things for people to spend money on; everyone consumed less than today. Ever-increasing supply of land and housing as the country expanded to the west coast. Ample labor because of essentially open borders (only to Europeans). Less productivity growth. Like I already said: inflation has many causes.
WalterBright · · focus · HN ↗
1. What happened in 1914 that changed it all?
2. Why was there massive inflation in the years before the Constitution was adopted?
3. Why was there massive inflation in the Confederacy?
4. Few things increased productivity more than the cotton gin.
5. Why was there inflation during the California and Yukon gold rushes?
triceratops · · focus · HN ↗
You're a smarter guy than me. I don't know how many times I have to say "Inflation can have many causes, often simultaneously". I'm sorry but you don't have an open mind.
> Why was there massive inflation in the years before the Constitution was adopted
I don't know. No Federal Reserve to blame for sure.
> Why was there massive inflation in the Confederacy?
Supply shortages in a wartime economy. Low confidence in the Confederate government, and therefore its currency.
> Why was there inflation during the California and Yukon gold rushes?
In California or in the country generally? In California I'd guess it's because a lot of people moved to an undeveloped place in a very short period of time. They all needed housing, clothing, equipment, and food, and consequently there was a temporary supply shortage. Some people struck gold (new wealth), so they could pay for the things they wanted.
> Few things increased productivity more than the cotton gin.
And that increased the value of farmland in the South, didn't it? The owners had more money than they did before. So are you claiming the South actually did have inflation at the time, or that it did not?
> What happened in 1914 that changed it all?
Many things happened. For instance, WW1 began. Wars reduce trade and drive up demand for fuel and other raw materials.
A few years earlier in 1907 the US passed the first of a series of acts to reduce immigration (there were updates passed in 1917, 1921, and 1924). That reduced labor supply. Also by that time in history the US had expanded all the way to the west coast. There was no new frontier to send excess people out to develop.
The US mortgage industry began in the 1870s.[1] That is probably the beginning of widespread consumer credit.
I know for you all that matters is "The Federal Reserve started in 1914". Like I said, you're unwilling to learn something new.
1. <a href="https://www.richmondfed.org/publications/research/econ_focus/2023/q1_economic_history" rel="nofollow">https://www.richmondfed.org/publications/research/econ_focus...
sethammons · · focus · HN ↗
Elasticity of goods has entered the chat. If a significant amount of inelastic goods' price increase, cue inflation. Energy costs, especially fuel, are classic drivers of inflating prices.
WalterBright · · focus · HN ↗
That's what politicians want you to believe ("Putin's price hike"), to divert attention from the real cause, massive deficits, which are the fault of the politicians.
BTW, Rockefeller dropped the price of kerosene by 70%. Why was there no deflation?
someonebaggy · · focus · HN ↗
WalterBright · · focus · HN ↗
pamcake · · focus · HN ↗
And the ripples don't stop there.
WalterBright · · focus · HN ↗
someonebaggy · · focus · HN ↗
If TVs got a bit cheaper but rent went up, there was inflation.
WalterBright · · focus · HN ↗
someonebaggy · · focus · HN ↗
WalterBright · · focus · HN ↗
someonebaggy · · focus · HN ↗
quickthrowman · · focus · HN ↗
WalterBright · · focus · HN ↗
> Commodity prices going up definitely causes inflation.
Nope. The proof is when they come down, there is no deflation.
frollogaston · · focus · HN ↗
seanhunter · · focus · HN ↗
ThrustVectoring · · focus · HN ↗
Like, there's a trade you can do where you load up an actual tanker with oil, park it, and sell an option to buy that oil. The cost of using this tanker and holding this oil a pure waste compared to just having a market-clearing quantity available at a consistent price at all times, but if the market is scared enough it makes money.
qeternity · · focus · HN ↗
That trade does not work today when the market is very inverted: you buy the spot oil, and sell a call in the future. But the term structure is pricing lower oil prices in the future. You take that hit on your spot cargo.
That trade only works if you are bearish the curve and bullish flat price. And if you have this view, it's just about the worst possible way to structure that trade.
The cure for high prices is high prices. Curve inversion ensures that anyone with oil today is incentivized to sell it asap.
ThrustVectoring · · focus · HN ↗