[dpc_pw]

I don't even understand what this is supposed to mean. Every asset allows infinite inflow of capital. If humans wanted, they could trade everything for TSLA, moving it's price to gazzilion dollars per share.

Derivatives are transaction between to parties like any other. One side pays money the other takes money for making certain bet.

The problems I'm aware of with derivaties is that it makes easier for companies to hide their speculative bets off the balance sheet, and it exaggerates overleveraged long-term bets. But it's hardly a root of all evil.

[marcus_holmes]

OK, but in a "real" asset there is a limited supply of the thing being bought. You cannot buy an infinite amount of (e.g) houses, or corn, or pork bellies, because there isn't an infinite amount to sell. But I agree that you can invest an infinite amount of money in these things because as you buy up more, the price increases.

Derivatives remove the supply limits. Because, as you say, essentially derivatives are all about making bets rather than actually buying anything. If you want to bet a bajillion dollars in a derivative, the only thing limiting you is how many people want to bet against you. I get that this is similar to conventional supply/demand, but it's not the same.

The reason it's not the same is because there's no link to the actual production (aka what TFA is talking about) of the thing. You can make a bet that pork belly prices will go up or down regardless of how many actual pork bellies are being made. So capital flows get detached from actual production, which is where we came in.

And yes, I get that buying a stock is "making a bet" that the stock or share is going to increase in price. But that's only if you're speculating on the price. There are people (or at least there used to be) who buy a stock because they want the dividend. Or, perish the though, because they actually want the pork belly to make bacon with.

[dpc_pw]

There are people who buy derivatives for practical rational reasons as well - e.g. producers who want to lock the price of pork belies, or business hedging currency risk in an international transactions. In a normal market

If people are crazy-buying TSLA stock, TSLA can issue more stock. If people are piling crazily into corporate treasuries and the yields are going down, corporations will issue more debt (and e.g. buy back more of their own stocks). When people were pilling up into a housing bubble in 2005, the builders were creating mc mansions like crazy as well.

All the financial assets are prone to systemic over leveraging, and fiat money central bank induced bubble is affecting absolutely every asset: housing, debt (private & public), equity, derivatives. Different things explode at the time, and central banks need to run to the rescue by blowing the bubble even bigger.

If it weren't for fiat money bubble, derivatives would be mostly rational markets as well.

[SpaceRaccoon]

One issue I see is that derivate instruments tend to be used for short-term speculation, meaning that capital is tied up in short-term speculation, instead of financing businesses and projects for long term growth.