What Are Inflation Derivatives?

Inflation refers to the continuous and widespread rise in prices over a period of time due to the depreciation of the currency due to the actual demand for money being less than the money supply, that is, the actual purchasing power is greater than the output supply under the condition of currency circulation. The essence is that the total social supply is less than the total social demand (the supply is far less than the demand). ^[1]

Difference from deflation

1. The meaning and essence are different: Inflation refers to the economic phenomenon that the issuance of banknotes exceeds the required amount in circulation, which causes the devaluation of banknotes and the rise in prices. The essence is that total social demand is greater than total social supply; deflation is related to inflation The opposite of inflation is an economic phenomenon that refers to an economic phenomenon in which the overall price level continues to decline for a long period of time and the currency continues to appreciate during a period of relative economic contraction. In essence, the aggregate social demand is continuously smaller than the total social supply.

2. Different performance: The most direct manifestation of inflation is the devaluation of banknotes, rising prices,

Classified by the severity of inflation

Low inflation

Low Inflation is characterized by slow and predictable price increases. It can be defined as one-digit annual inflation. Prices at this time are relatively stable, and people trust the currency. ^[3]

Generally speaking, inflation is bound to cause

It refers to a situation that occurs in the circulation of money: the currency in circulation is mainly due to the excessive circulation of banknotes, which greatly exceeds the actual amount required for circulation, resulting in currency

Inflation exchange rate and inflation model

Assume that domestic A trades with foreign B. Foreign B can be a single country or multiple countries. It can also distinguish trading countries by currency range, such as the euro area. In the case of free exchange rate conversion, the foreign exchange rate of foreign B to domestic A declines, and the domestic currency of A increases in value. The stronger the export-oriented enterprise, the lower the exchange rate. The relative costs of all companies and industries in country A to foreign B have generally risen. Since the profit margins of all enterprises and industries in country A have already achieved the maximum difference, the strong enterprises in country A have basically maintained the same or slightly increased domestic prices. ; Domestic A domestic weak enterprises and industries increase domestic domestic prices (demand is greater than the demand of strong corporate products), so the unit product profit margin of domestic domestic strong enterprises or industries declines; the unit product profit margin of domestic weak enterprises and industries slightly decreases or rises The profit margin of domestic strong enterprises and industry units fell faster than the decline in profit margin of domestic weak enterprises and industry units. ^[7]

The profit margin difference between strong and weak enterprises and industries has narrowed, and the yields of domestic weak enterprises and industries are higher than the domestic strong enterprises and industries, regardless of whether the overall profitability of domestic enterprises and industries has increased or decreased. Under normal circumstances, the profit margins of all enterprises or industries generally decrease; due to the lower exchange rate, the prices of export-oriented enterprises and industries for foreign exports have actually risen, so exports have been suppressed, and export-oriented enterprises and industries have begun to decline in profit margins and their earnings have decreased.

From the perspective of foreign B: the rise of domestic A's exchange rate with foreign B, the depreciation of foreign B's currency, the weaker the export-oriented enterprises, the higher the exchange rate, and the relative costs of all foreign B's enterprises and industries to domestic A's overall decline.

As the exchange rate rises, the profit margin of foreign-owned companies and industries will become more and more different. The strong domestic foreign companies prices will stay the same or slightly increase relative to their domestic prices. The prices of products exported to country A can increase (foreign demand). (Prosperous); weak domestic companies and industries in foreign country B increase domestic domestic prices (foreign product prices are high, if foreign products are dumped, the opposite is true), so foreign unit B domestic strong enterprises or industries' profit per unit product rises; foreign company B The profit rate per unit product of the weak domestic enterprises and industries has risen sharply. The profit rate per unit product of the strong foreign companies and industries in the foreign country B has been slower than that in the foreign countries.

The profit margin between strong and weak companies and the industry has widened. The profitability of foreign B's weak enterprises and industries is higher than that of foreign B's strong enterprises and industries; the overall profitability of foreign B's enterprises and industries has increased. As the exchange rate rises, the prices of export-oriented enterprises and industries to foreign countries actually decrease, so exports have been strengthened, and the profitability of export-oriented enterprises and industries has begun to rise.

It can be seen from the above: The trade surplus of country A to country B promotes the intensification of corporate or industry monopoly through exchange rate changes. The weak enterprises in country A die faster than the weak enterprises in country B. The division of labor leads to a trade surplus or deficit, and the trade surplus or deficit further strengthens the division of labor; because the division of labor (industry competition) causes the profitability of industries or enterprises to be differentiated. As a result, countries with a strengthened international division of labor have a single economic structure and a large surplus.

From the above, it can be seen that for country A: due to rising costs and overproduction of products, the overall profit rate of country A cannot continue to rise and may fall; the total profit may continue to rise. At this time:

The cost of a domestic A and foreign B enterprises and industries is inversely proportional to the exchange rate rise and fall.

2. The difference in costs between domestic and foreign enterprises and industries arises from specialized division of labor, and exchange rates are not essential.

Third, the productivity of enterprises does not increase, and it is difficult for prices to fall. Moreover, it is difficult for enterprises to reduce prices by eliminating old products through innovation. Inflation exists in a spiral upward trend, that is, money is depreciating more and more; profit equalization is global under foreign trade. Inflation in one country can cause inflation in many traded countries, and inflation in multiple trade countries can cause global inflation. Inflation fluctuates cyclically in various countries, and the total production of each country also continues to rise. The content of price increases varies from country to country. One country may be the industrial price index and the other country may be the consumer price index.

From the model of the two countries AB above: the exchange rate declines and the profit rate declines, the exchange rate rises and the profit rate rises offset each other, so when the profit rate of the same industry is converted into a single currency, the law of profit averaging still exists. Exchange rate investment and interference or foreign capital investment will affect the competitiveness of various industries in the country.

From the perspective of modern finance, if the continuous investment of country A in country B is in the state of free exchange rate, the rise in the exchange rate of country A to country B means that the profit rate of country B will be higher than that of country A, which will increase the exports of country B to Country A. Similarly, the continued export of products from country A to country B will also lead to the same result. It usually shows that the profit rate of country A generally decreases, the profit rate of country B generally rises, and the investment of country B is stimulated. This is because the profit rate of country A was higher than that of country B before. If it is short-term exchange rate fluctuations (such as speculation), it will not affect the import and export of products, which will increase the inflation rate in either case. It is wise for China to curb inflation by increasing exchange rate flexibility, but to relax restrictions on the import of goods; this may reduce the competitiveness of certain industries or enterprises.

As for foreign trade, here is the transfer of international inflation. The Phillips curve was mentioned earlier, and there is an inverse relationship between inflation and the unemployment rate. However, the situation of the anti-Phillips curve is also found, such as the United States in the 1990s. The economy of the decade. What is the reason for this? This is because of foreign trade. The relationship between inflation and unemployment is that when the economy develops, the inflation rate rises and the unemployment rate decreases; when the economy develops slowly (the economy is not developed), the inflation declines and the unemployment rate rises.

If a country imports a large amount when it exports; or exports a large amount when foreign investment grows, and maintains the exchange rate balance, it can transfer unemployment, thereby shifting the inflation rate and developing the economy. This cost is to transfer unemployment and inflation rates to some other Countries, but this shift could cause a global economic crisis. In the 1990s, the United States maintained rapid growth through a large number of exports, making exports slightly smaller than imports, at the cost of a global financial crisis at the end of the last century and slowing economic growth in the 21st century.

Small countries' trade with large countries has played this transfer to the fullest, such as the rapid development of South Korea and Singapore in the last century, while maintaining low unemployment and low inflation rates. Due to the small population base and economic aggregate of small countries, unemployment has been transferred to After a big country, the population base and economic volume of the big country will be large, and it will not significantly affect the unemployment rate and economic growth of the big country. For example, if the small country transfers 5% of the unemployment rate, it may only be equivalent to the increase of the big country by 0.5%. If a large country transfers to a small country, it may cause a global economic crisis. The transferred country may also have high unemployment, high inflation, and a widening gap between the rich and the poor.

The price of agricultural products is affected by the impact of natural disasters on the supply and demand of major crops and the increase in population; in addition, changes in use are also not insignificant, such as corn processing feed and soybeans for biofuels.

A securities investment equilibrium model:

Set Bond P, Stock K, Fund J, Other Financial Derivatives Y; Securities Comprehensive Interest Rate S

The proportion of each financial product is gp, gk, gj, gy, which respectively represent the proportion of P, K, J, Y in the value of the financial market.

T represents the risk interest rate, also known as the risk return rate: Tp, Tk, Tj, Ty represent the risk return rate of P, K, J, Y

R represents the yield: Rp Rk Rj Ry represents the average yield of P, K, J, Y, respectively.

Set the bank's interest rate to r; as the return rate is difficult to determine and does not affect the discussion, the risk investment is eliminated.

The comprehensive interest rate of the securities is:

S = (Rp-Tp) gp + (Rk-Tk) gk + (Rj-Tj) gj + (Ry-Ty) gy

Because bonds, stocks, and funds account for most of the securities, funds rely mainly on stocks and bonds, so the formula can be rewritten as:

S = Rp Tp gp + Rk Tk gk

The relationship between the securities comprehensive interest rate S and the bank interest rate r can be used to analyze whether the investment scale of the securities market is excessive. Because r's interest rate and liquidity are the only guarantees for capital security and minimum returns. The risk rate T is directly proportional to the bank interest rate r, and is inversely proportional to the expected return rate Rp Rk Rj Ry of the bond, stock, or fund. In addition to government policies, inflation, economic growth, unemployment, etc. will also affect risk rates.

1. When r> S, securities prices are generally overvalued and the market is dangerous; when the interest rate r is low, the market bubble is very large, and the market may collapse at any time; when the interest rate is high, the market is out of control, the market risk is high, and investors The risk is too high, the interest rate should be raised, and inflation may occur. This is because some industries have good returns and promote imbalances in investment. The situation of low interest rates is equivalent to Japan's 90-year bubble economy.

2. When r <S, the security price is generally underestimated, the risk is low when the interest rate r is low, the investor's risk appetite is weak, the funds are excessive, and inflation may be high; when the interest rate is high, the risk is low, the market needs funds to promote, and the interest should be Lowering to promote investment, low inflation, and higher interest rates are equivalent to US economic regulation this century.

The risk rate is a specific rate. Due to the influence of human factors, the risk rate is sometimes overestimated and sometimes underestimated. That is to say, the comprehensive interest rate of the securities is low, and the risk rate will rise faster (more), which is why the market Changes are often faster than expected; under normal circumstances, the lower the interest rate, the larger the securities market. The slight change in the interest rate of the central bank regulates the flow of funds, and does not cause the flow of funds to the bank; usually, it flows within securities, such as the conversion of bonds and stocks; this is because changes in interest rates often become the vane of market conversion. It can be seen that the rate of return is the main quantity that determines the investment form.

The financial industry and inflation: The relationship between the financial industry and inflation is the same as before, which meets the average profit margin. It's just that the financial industry involves the liquidity of assets; that is, the financial industry's profit margin is lower than other industries. For example, when the financial industry returns 4%, the returns of other industries may be 6%.

This 2% difference is the requirement of the specific economic environment for liquidity, which varies from period to period. If the financial industry's yield exceeds 4%, funds from other industries will flow into the financial industry, otherwise the opposite will happen.

When the government uses monetary policy to shrink credit or economic depression, the expected return rate will rise significantly (and the expectation of weakened liquidity) when the overall return of the financial industry is unchanged or reduced; funds flow into the financial industry from other industries. On the contrary, when the economy is optimistic or the government relaxes credit, the currency is diluted, the expected return rate is significantly reduced, and the flow of funds from the financial industry to other industries in order to obtain a higher return on investment when the overall returns of the financial industry is unchanged or increased. ^[7]

Inflation cycle model

1. At low interest rates, inflation is rising, investment is growing, investment is dominated by duplicative investment, innovation investment is falling, and innovation investment is increasing productivity or inventing new products. Unemployment rate will decline. If innovation investment is less dehumanized, the unemployment rate will decrease by a small margin. On the other hand, the unemployment rate will decrease by a large margin. Rising inflation will cause wages to rise. Wages will not rise faster than inflation. Investment is reduced. The difference in average profit margins between industries has been maximized and has begun to shrink.

2. Inflation is at its highest. The negative impact of inflation forces the interest rate to increase, the cost of replication investment to rise, and investment to decrease; while the proportion of innovative investment increases, total investment decreases, unemployment rises, and inflation falls. Product production continued to decrease. ^[1]

3. The interest rate is the highest, copying investment has been greatly reduced, innovation investment is the mainstay, the total investment has been minimized, inflation has continued to fall, reached the lowest value and rebounded, and the unemployment rate has risen slightly or sharply. The cost of capital reaches the highest level, and the replicative investment reaches the lowest level. Enterprises may lay off a large number of employees. If innovation investment aims to reduce the number of people, the unemployment rate will increase rapidly; on the contrary, innovation investment can receive a portion of the labor force. Due to the high interest rate, innovation investment will not increase rapidly, so the increase in unemployed people is greater than the increase in employment, and the unemployment rate may rise slightly.

Innovation investment may cause short-term economic growth, but the contraction of the market in the later period will prevent economic growth. As a small increase in innovation investment brings economic growth, if the government wants to reduce the unemployment rate, the market expects a good outlook, the interest rate will decrease, and inflation will begin. rise.

4. The decline in the interest rate has had an effect. Economic growth, increased investment, and innovative investment results have produced significant results. Replica investment has picked up and products have increased. Replica investment may exceed innovative investment. The market demand has increased, unemployment has fallen, unemployment has continued to rise, and inflation has continued to rise, thus entering a new cycle.

Inflation will be more difficult to measure and control in the future. This is because the future economic performance will be a knowledge economy. Intangible products will account for a larger proportion of economic growth, and the pricing of such products will be more diversified, such as package value systems or uncertainties. The difficult-to-measure value system will make customers' bargaining power weaker. Such as network products; the overall cost of additional products and services is more invisible. Government control of prices is more difficult. Industry spreads are forced to widen, and inflation will be even more disruptive.

In general, the government has three functions for economic regulation: one is to promote economic growth; the other is to balance income and distribution; the third is to coordinate the spread between industries.

Capital differentiation provides the basis for capital's pursuit of profit maximization, and inflation shifts income and distribution; this process makes the capital economy form the driving force behind your pursuit, which is also the endless source of vitality of the capital economy.

Inflation performance factors

One of the effects of stable, small-scale inflation is the difficulty in renegotiating price cuts, especially for wages and contracts. Therefore, if prices rise slowly, the relevant prices will be easier to adjust.

The financial system considers the "potential risk" of inflation to be a basic investment incentive higher than the accumulated wealth of savings.

For the lower class, inflation often increases the negative effects of discounting before economic activity. Inflation is usually caused by the government's policy of increasing money supply. What the government can do about inflation is to tax stagnant funds. When inflation rises, the government raises the tax burden on stagnant funds to stimulate consumption and borrowing, which increases the flow rate of funds and increases inflation, forming a vicious circle. Hyperinflation in extreme cases

International trade: If domestic inflation is low, the reduced trade balance will undermine the fixed exchange rate.

Sole cost: Because the value of cash shrinks during inflation, people tend to hold less cash during inflation. The term indicates that real costs flow to banks more often. (The term cost of soles is a joke, meaning the cost of wearing out soles as they walk to the bank.)

Menu costs: Firms must be more diligent in changing product prices. This term indicates the cost of the restaurant to reprint the menu.

Hyperinflation: If the degree of inflation rises out of control, it will interfere with normal economic activities and damage supply capacity.

In an economy, there are several sectors that are included in the inflation index, and some sectors do not. Inflation is redistributed from the unprogrammed sector to the included sector. When the magnitude of impact is small, this is a policy choice. It does not impose a tax on saving priority but on liquidation priority. If the impact exceeds a certain range, the effect is distorted and becomes an individual's "investment in inflation", that is, it encourages the anticipation of inflation.

Because the above-mentioned reasons for fighting inflation are higher than the small impact of anticipating their behavior and holding large amounts of funds, most central banks, taking into account price stability, target visible but extremely low inflation. ^[3]