I recently came across a question on Linkedin regarding the relationship between money and demand.
"What comes first money or demand? Did we not see money creating demand in some of the profound turnarounds of the biggest economies since the turn of this century?"
I think demand should precede money. However, since the beginning of 2000 this has been proven incorrect by the biggest economies of the world (US/EU). Greenspan's (in?)famous decision to parcel out monies to households to prop up demand and lift the economy from recession actually succeeded. This simply fails the idea of demand preceding money. So is this old school notion incorrect?
Perhaps not. We need to take a step back and analyse this activity in global perspective and not in isolated US economy. What we have seen recently is a special case of loosening monetary policy to create demand. This demand actually helped economies to resurrect because someone, somewhere (outside) was producing to meet this demand. Had it not been the case, Greenspan's idea would have triggered inflation and nothing else.
This is one explanation but this is still incomplete.
We need to take another step back.
The whole idea of Greenspan printing money worked because US$ bill is an asset which has a demand in the rest of the world. It's the demand of US$ globally that allowed Greenspan to produce more of it and it was exchanged for cheaper products from rest of the world.
Say a country like India or Uganda can't even dream of such turnarounds during recession as they might end up like Asian tigers in the 90s. Perhaps also, it is partially the reason why EU is not able to sustain the same monetary policy for as long as US has been able to (evident of Euro still has a far way to go to replace USD as a global currency).
Thus the demand has always reigned supreme and will be so in times to come.
