The US dollar will succumb to the law of supply and demand

I have a simple mind and I believe most things actually conform to simple principles.

The law of supply and demand can be stated as simple ratio:  p=d/s where p=price of a commodity; d=demand for the commodity; s=supply of the commodity.  This can be extended to the exchange of two commodities thus:  d1/s1=p=d2/s2, where the supply and demand of the first commodity determines how much of it is necessary (p) to barter for the second commodity.  Money is also a commodity likewise subject to the law of supply and demand.  So if dollars are few, and there is large demand for them, then they will have great buying power and p will be small.  But when there is little demand for dollars or a large supply, then they will have diminished buying power and p will grow.

We had a situation where a large number of dollars was created through credit expansion.  But credit expansion can result in bursting bubbles and credit shrinkage.  In response to the credit deflation called the sub-prime mortgage crisis and its aftermath, Bernanke has created a new supply of dollars in process called QE, quantitative easing–not newly expanded credit, but dollar dollars.  So now we have new money which can’t deflate.  And this has greatly reduced demand for it–because now the Chinese, et al., who have plenty of dollars, are seeking new ways of divesting themselves of dollars.  Not only so, but interest rates are almost zero for holding money in a savings account: which means that there is next to no incentive to holding dollars–this keeps the demand low.  So now US dollar supply is up while the demand for dollars is down.  So guess what? The prices of basic commodities are all up.  This trend will continue, with great volatility in the financial markets, until Bernanke stops creating new money and allows interest rates to rise.


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