Gold News

The mischief of cheap money

Late-night shopping in London's West End is never much fun, especially at Christmas. But for a brief moment this week, the hard slog almost seemed worth it...

I found a cardigan costing more than one ounce of gold. It looked perfectly ordinary - chunky knit, good-quality wool, available in a range of muted colours. There was a chance my wife would like it. So maybe, this Christmas, she wouldn't swap her gift for a refund just as soon as the shops opened again on Dec. 26.

But looks were deceiving, and this must have been no ordinary cardigan. For there was the price-tag, a mere £365. That's $715 at today's exchange rate.

Did gold thread show in the detail? Did chinchilla fur line the pockets? The label said nothing about cutting fuel bills for a family of four this winter. So you might wonder, as I did...dumbstruck in Selfridge' whose world a wool cardigan could possibly be worth so much money.

But that is the world we all happen to live in today it would seem, a place where value and worth have become total strangers. And if my wife takes the present I buy her straight back to the shops after Christmas, I'll be blaming the bubble in cheap money. No way was I swapping an ounce of gold for a cardigan.

"Cheap money is popularly supposed be an unalloyed good thing," as Martin Hutchinson writes for, "allowing people to borrow money for home mortgages more easily, encouraging business expansion and giving Third World countries access to capital they would otherwise be denied. Like many popular superstitions, this one is largely the opposite of the truth."

The real truth about cheap money has been plain for more than 250 years. Richard Cantillon – "the father of modern economics and one of history's great traders," as Sean Corrigan reminds us at – first spotted that the process of creating new money can never be neutral. "Somebody, somewhere has to have the new money first," Corrigan notes, and that lucky soul gets more spending power than his efforts deserve. It's a windfall, pure and simple. And when our man spends his good fortune, he then dilutes the value of money held by everyone else, stealing a piece of their purchasing power and making them poorer.

"Governments are often tempted to answer the cry for more purchasing power by simply creating more money," writes a central banker of all people. "But in so doing, the opposite effect is achieved – the purchasing power of money is actually reduced.

"The result," continues Jerry L.Jordan in the Federal Reserve Bank of St.Louis Review, "is inflation: a rise in the number of dollars required to purchase a given standard of living." Put another way, a perfectly ordinary cardigan that I'd like to buy my wife as a present now costs $715.

Okay, you could argue that the gift is out of my price bracket – and it is. That's not to say it is worth $715 of anyone's cash. And remember, this was a plain woolen cardigan, hardly extravagant. It was just a cardigan that my wife might have liked. But that humble aspiration is now beyond my standard of living.

The mischief wrought by cheap money doesn't only fill clothes racks this Christmas. Its dirty finger-prints were all over Friday's edition of the Financial Times, too. The stock market pages proved that M&A deals and M&A rumours are all investors need to worry about at the moment. Forget "value" or skillful management; the chance that an investment banker might persuade one company to buy another is all that matters.

Flick to page 22, and the FT announced the arrival of the world's largest listed hedge fund. Page 24 told us about "bought deals" in London's AIM which underwriters simply give money to a company when it floats its shares...and then goes in search of investors to buy the new shares. Page 41 explained that the South Korean stock market now leads the world in the volume of equity derivative trades each day.

Just to the right of this story was a report on €1.7bn worth of "payment in kind" notes issued by a private Italian telecoms firm. They don't pay a cash coupon, but simply give bondholders more bonds instead. The FT calls PIK notes "ultra high risk". Yet investors "clamoured" to buy them. And there, at the back of the newspaper, came news of Morgan Stanley's latest cheap money wheeze.

This week Morgan Stanley took out a loan worth $360m, borrowed in Japanese Yen. These "ninja loans" as they're known follow "samurai bonds" in milking Japan's ultra-easy monetary policy for cheap cash to invest elsewhere in the world – thus raising the prices of all things, including wool cardigans. "Bankers say ninjas could get a boost in January," reports the FT, "when for the first time syndicated loans involving parties in the US, UK and Japan will not be liable for withholding tax, potentially creating a huge unified market."

So it's no wonder who's getting first dibs on today's flood of new money. In the City of London this Christmas, total bonus payments will hit £8.8bn according to the BBC. Dr.Marc Faber said in a recent interview that Wall Street will give $36bn in bonuses to its traders, dealers and deal-makers this year. In other words, the money-shufflers are also creaming all the advantage that inflation can give.

The rest of us are stuck trying to find Christmas gifts our loved-ones might prices we're willing to pay.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are 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. Please review our Terms & Conditions for accessing Gold News.

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