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There are lots of
reasons why QE hasn't yet created inflation in the rich West...
SO HEADLINE writers everywhere got to say
money really does grow on trees today.
Gold, in fact, has been
found in minute quantities in
eucalyptus trees in Australia. Analyzing tree
leaves and bark could now unearth gold deposits up to 30 metres below ground
elsewhere in the world, geochemists say.
Good news perhaps for the
mining sector. But unearthing that ore won't be easy like picking a leaf.
Making money is never cost-free. And not even money-printers are making as
much profit as you might imagine right now.
UK firm De La Rue today
gave its second profits warning of the year. Weird as it sounds,
there is over-capacity in note printing worldwide, it claims. That may seem
hard to believe, what with quantitative easing still rolling ahead at record
levels. But money printing isn't what it used to be, even without the US Fed
daring to taper its $85 billion per month. And De La Rue is lagging profit targets
set back in 2010, when asset purchases with newly-minted central bank cash
was hitting its stride.
De La Rue Plc is the world's largest independent printer of
banknotes. It has printed 150 different currencies over the last 5 years, and
designed two-fifths of all new banknotes issued anywhere in the world since
2008.
You might think that was
(ahem) a license to print money. But volumes actually fell this year, De La
Rue says, down 10% in the first half of 2013.
Surely quantitative
easing means there's more money around? Near-zero interest rates are also
bringing more credit and spending to the economy, right? And what about the
revival of real estate prices, most notably in UK housing but also worrying German politicians as even Berlin rents soar?
All that money, however,
is electronic, not physical paper. Indeed, the central banks' printing
presses are today an "electronic equivalent" as current Fed chair Ben
Bernanke put it way back in 2002. Urging the Japanese to debauch the Yen
just as he's since attacked the Dollar, Bernanke only used "printing"
as analogy, however. Whereas it was paper money, not photons blinking on a
bank-account balance, which fired inflation in the basket-case economy of
Zimbabwe when Bernanke spoke a decade ago, and in Argentina today.
Digitized cash, in
contrast, is now the real thing, as military strategist, historian and
consultant Edward Luttwak noted this month in an aside on Italian gangsters. Starting in the 1990s,
says Luttwak, the Calabrian
family gangs pushing cocaine north into Europe as far as the new markets of
the old Soviet states found their "Colombian [cocaine] suppliers refused
to accept cash, because it was no good for investing in Miami real estate or
local hotels or restaurants. The Calabrians needed
real money: not bundles of paper but deposits in bank accounts that could be
wired."
Fact is,
legitimate businesses cannot use cash. And worldwide, reckons Mastercard (with a vested interest, of course), business
transactions now account for 89% of the value of payments. Consumers,
meantime, are also moving away from cash (at least, outside the black economy
they are; and those immoral earnings still need laundering into the
"real money" of digitized bank databases in the end). As a
proportion of retail transactions by number, cashless payments now make up
80% in the United States, 89% in the UK, and all but 7% in Belgium according
to Mastercard. Even ignoring the plastic PR team,
nearly half of UK consumer transactions are now done without cash, with
currency payments sinking almost 10% by value in 2012 from the year before,
according to the British Retail Consortium. The bulk of non-cash growth came
from "alternative" methods, notably PayPal, with "new ways to
pay and new ways to shop shaping the retail landscape like never before."
Might this explain why
consumer price inflation hasn't taken off in the developed West? Yes, there's
lots more money around. Yes, people keep buying gold as protection. Because
basic economics says this should push the general price level higher, as the
value of each monetary unit is shrunk. But all this extra money sits on hard
drives, servers and in the cloud, rather than in purses and wallets. That's
where money is transacted too, in intangible code. Lacking a physical
presence, perhaps this wall of money loses its impact.
There are lots of other
reasons you could give for why inflation hasn't surged with the money supply.
It's all locked up in banking reserves, for instance, instead of reaching the
"real" economy. Increased spending power since 2008 has gone almost
entirely to the richest households, who use it to buy shares, property and
fine art rather than Doritos and donuts. Or perhaps central bankers really
have kept that credibility which they fought to attain after the 1970s'
inflation. Western households are now sure that the cost of living will never
be let loose again.
But the birth of physical
money back in ancient Greece changed our brains and our world. Coins made
kings of anyone holding them, with the "universal equivalent" marking
the beginning of the end of feudal society just as it created an independent
yard-stick for all values �– mercantile, religious and personal. This is
what the myth of King Midas is about, after all.
The human brain and how
it conceives of the world is being changed again by digitization today. Just
ask a 20-year old (go on, ask them. Ask them anything, and see if they can
answer without checking online. Ask a 45-year old come to that). Plenty of
people worry that it's all changing
us for the worse, twiddling their fears about the internet by writing, of
course, on the internet. Plenty of other idiots think the posthuman
world will prove a new joy, with the internet's jibber-jabber of lies, confusion and
stupidity taking us back to some forgotten Eden where everyone's views are
equal. Like, y'know, in the way opinions were freely allowed
to medieval peasants who couldn't read? Today's infotainment and readers'
comments let knowledge morph and shift just like knowledge was shared and communal pre-Gutenberg. Who
needs the Enlightenment?!
Either way, perhaps our
brave new digital world also revokes the iron law of money. Perhaps our flood
of new cash will never end in higher living costs in the way it always has �–
always has �– in the past. Because money we cannot touch cannot
in turn touch prices as surely as paper or metal did.
Yeah right. And money
really does grow on trees.
Adrian Ash
Adrian Ash is head of research
at BullionVault, the secure, low-cost gold and
silver market for private investors online, where you can fully allocated
bullion already vaulted in your choice of London, New York, Singapore,
Toronto or Zurich for just 0.5% commission.
Please Note: This article is to inform your thinking, not lead it. Only you can
decide the best place for your money, and any decision you make will put your
money at risk. Information or data included here may have already been
overtaken by events �– and must be verified elsewhere �– should you choose to act on it.
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