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It's Just Supply & Demand

When all the pundits have spoken and all the articles like this one have been written, this entire market and economy for that matter has to do with one simple relationship. That is the relationship between Supply and Demand. More demand equals high prices and more supply equals lower prices. I know this first paragraph isn't groundbreaking, it is important to lay the frame work for how to look at all markets no matter what it is pricing.


Inflation acts the same way the more money supplied into the economy reduces the value of the dollar hence raising prices on everything that dollar can buy (Inflation). The reduction of money supply will increase the value of the dollar reducing the prices of goods sold (Deflation).


I found this chart interesting it shows M2 (Money Supply) and how it spiked during Covid's peak and how it is now getting tamed by the Federal Reserve who's task it is to fight inflation.



I'm currently on watch for something that is scarier than inflation and that is deflation. People feel a lot of pain when their money is not holding value. However history has shown that when the Government in the form of The Federal Reserve tries to fight inflation by raising rates and reducing M2 (Money Supply as you can see by the right side of the above chart flattening out) They tend to break stuff. By breaking stuff I mean tightening rates so much that it restricts the economy and leads to some unfortunate unintended consequences.


These consequences tend to lead to fear and low confidence in spending. Which can in extreme cases lead to deep recessions or even a depression. I hope my worries amount to nothing. However, I've been around these markets long enough to know that just because the market "always goes up in the long run" doesn't mean it can't lose its way for an extended period of time. Good luck!

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