The Big Money Demand Surge
Yet recently, we have seen the prices of commodities except for gold drop sharply, as have stock prices. How is that possible? Because the fear of a U.S. recession and the European debt panic have sharply increased demand for money and for Treasury securities which are perceived by investors as being as safe as money.
The money demand increase until a month ago or so was not strong enough to counteract the increase in money supply caused by QE2, so until recently stock prices and commodity prices all soared while the dollar fell, meaning that the money supply increase caused the value of money to drop. But the fears of a weaker economy has caused money demand to spike, something that can only mean two things: Either money supply increase or the value of money increases. The latest month we have seen a combination of the two.
Note that an increase in money demand can increase money supply. When stocks are perceived as too risky and when the yield difference between Treasury securities and bank accounts (where interest rates have been zero or nearly zero for a long time) fall, this leads more people to increase their holdings in bank demand or savings accounts. If you're getting no extra interest (or lower risk), then why reduce the availability of your savings by holding it as something other than bank accounts that can be used as means of payment?