The Corner

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The Dollar and Demand


Kevin Williamson writes, “What is underappreciated is that the laws of supply and demand apply to currencies, too: You create new money (and, boy howdy, have we been creating money!), you increase the supply, demand does not change, and the price goes down.  . . . Inflation happens when the money supply is increased, regardless of whether it shows up in the Consumer Price Index.” The second sentence I’ve just quoted can’t be true on any reasonable definition of “inflation”: Does Kevin really think that you have “inflation” when the demand for money goes up, the supply goes up, and prices stay flat? And contrary to the storyline presented in the first sentence (“you increase the supply, demand does not change”), the demand for money has risen–velocity dropped like a stone at the height of the crisis and is still below trend.

Kevin thinks that rising food and commodity prices reflect the devaluation of the currency. But CPI, even including food and energy, is not signaling high inflation, and spreads between inflation-indexed and non-indexed bonds don’t project high inflation going forward, either. This fact pattern suggests that what we’re seeing is just changes in relative prices.