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.
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.
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.
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...