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Comment by londons_explore | Hacker News Reader

> buying up the chips at a premium (i.e. above the washing machine cost).

Industries often act illogically in cases like this. You see it with many types of goods ordered a long time in advance.

If there is a sudden shortage, the people who have ordered their raw materials a long time in advance (who have effectively purchased a future for that commodity) think they made a good move and see it as a business advantage that they can continue production while their competitors who failed to plan cannot.

However, they often fail to see that it is an even better business move to still shut down production and sell those raw materials onwards to someone else who will pay handsomely for them.

Basically, the futures market should never determine if a factory is operating or not. If it does, then someone has made an irrational decision.

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> However, they often fail to see that it is an even better business move to still shut down production and sell those raw materials onwards to someone else who will pay handsomely for them.

There's also business value in being the washing machine company that didn't have to shut down production. If I'm building a lot of housing with washing machines, maybe I just wait and buy whatever just in time, but maybe I want to do a bulk buy direct from the manufacturer with delivery on a schedule; having a track record of continuing production during supply shortages makes it more likely that the deliveries will happen. If production is stopped whenever it's better to resale materials, it's hard for buyers to rely on scheduled deliveries and those buyers will turn to others.

>However, they often fail to see that it is an even better business move to still shut down production and sell those raw materials onwards to someone else who will pay handsomely for them.

Isn't this the short-term quarter-to-quarter mindset that gets constantly roasted on HN? Isn't there value to your brand in being a dependable supplier to your customers? And isn't there business value in retaining your workforce, instead of having to lay them off, since you shut the factory down?

> the futures market should never determine if a factory is operating

But what about washing machine futures?

Or more realistically, how much is shutting down the factory going to cost the washing machine manufacturer in terms of employee compensation, lost employees (more hiring and training), washing machine brand losses in the market, failure to deliver on existing contracts, and similar? They can't claim force majeure when they shut down the factory merely because they see a way to make slightly more profit than normal.

True... but that has to be compared with those same set of losses the car factory up the street will suffer if they don't get the chips...

If there is only enough chips for one factory to run, someone has to shutdown and take those losses. And the shutdown factory should be the one with less to lose, not the one who didn't buy futures in time.

> the shutdown factory should be the one with less to lose, not the one who didn't buy futures in time.

That sounds highly communist. The factory with the most to lose should have been looking out for themselves. They did not, so they suffer economically, and hopefully learn a lesson (or their bankruptcy stands as a lesson for others) for the future.

Because of their decisions, one of the factories can claim force majeure to protect them from some of the consequences of shutting down, while the other cannot, so the other shutting down and reselling their chips is probably not an option.

Salvaging chips out of washing machines might be the best possible option for everyone to fulfill their contractual obligations.

That's what you'd do in a command economy. In a market economy it's up to the company what they do; there are far more things "real people" try to maximize than just profit. You can see this as people acting irrationally, or you can see it as there're important factors your missing and/or not understanding.

Economists be like "guys, your doing it wrong - not maximising profit", economy be like "nah, your theories incomplete".

Somewhere, an executive's bonus pay is based off the number of units shipped each year. Not the amount of money saved for the company. Under that kind of regime, it actually makes less sense to sell the chips at a premium price. For the executive.

This is one reason I think most contracts for goods for future delivery should be public knowledge.

Ie. "Mr Smith purchased 68 tons of steel for delivery in New York June next year for $200k".

Then anyone wanting those same goods and willing to pay more can contact Mr Smith and make an offer to buy the contract.

I believe such a system would make the economy substantially more efficient, at the cost of privacy. More knowledge makes a better market. And more knowledge also increases tax revenues because under/overdeclaring goods values becomes much harder.

Why would anybody want to trade with Mr. Smith's contract in particular when a market for the contract still exists, with market makers and other participants providing bids and offers that is better what Mr. Smith can do? At least, assuming you are talking about a regulated commodities futures contracts like those which trade on the CME.

Mr Smith has a real for delivery contract, not a more common contract to own for some amount of time but no clue who is on either end. As such if you buy from Mr Smith you get real goods, while from someone else you may discover that you created a short squeeze, and not actual material is available: they may have to pay you a ton of $$$ to get out of the contract, but you don't actually get anything delivered.

If you really want the actual good and not the dollars, then you should by buying contracts backed by real goods that cannot be shorted. By contrast if you just want to make money there is more money in buying the contact that is a short with no material behind it. Of course knowing when a short squeeze will happen is left as an exercise for the reader - meaning I have no idea when this plan can work out only that once in a while it does.

If most buyers buy ahead like Mr Smith, then the liquidity in the spot market can dry up, especially in times of supply constraint.

Mr Smith and many people like him might happily sell on his steel for 10x the price he paid for it to someone desperate for some steel.

Yet, as things stand now, whenever there is severe market disruption, you frequently find goods aren't available for any price. Thats simply because Mr Smith and people like him continue to take delivery of the steel he ordered 6 months ago, and doesn't actually need right now, because he isn't aware of the guy down the street who really reeds it right away and will pay a lot.

If all goods are always 'for sale', then goods can be allocated efficiently to whoever needs them most.

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