Gold Grows on Trees, But Money Doesn't

24/10/2013 11:11 BST | Updated 23/01/2014 23:58 GMT

So money really does grow on trees, agree headline writers everywhere 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 gold mining sector. But still that ore won't be easy to pick. Making money is never cost-free. And not even money-printers are making as much profit as they'd like 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 money printing, it claims. Yes, really.

De La Rue is the world's largest independent printer of banknotes. It has printed 150 different currencies over the last 5 years, designing 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 money-printing volumes actually fell this year, De La Rue says, down 10% in the first half from the same period in 2012.

Surely quantitative easing means there's more money around? What about the rebirth of real estate inflation, most notably in UK house prices but also worrying German politicians as Berlin rents soar?

All that money, however, is electronic, not physical paper. Indeed, the central banks' printing presses are today an "electronic equivalent" as Ben Bernanke of the US Fed put it way back in 2002.

Might this explain why consumer price inflation hasn't taken off? There's lots more money around. 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 money sits on hard drives, servers and in the cloud, rather than in purses and wallets. And lacking a physical presence in the world, this wall of money loses its impact perhaps.

There are lots of other reasons you could give for why the cost of living hasn't surged with the flood of central-bank cash, known as quantitative easing. 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 top 1%, who use it to buy shares, property and fine art rather than weekly shopping at Tesco. Or perhaps central bankers really have kept that credibility which they fought for after the 1970s' inflation, with households now confident that the cost of living will never be let loose again.

But the birth of money back in ancient Greece changed our brains and our world. It made kings of anyone holding coin, 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 really about, by the way.)

Digitization is now changing our brains and world again (just ask a 20-year old; go on, ask them anything, and see if they can answer without checking online). So perhaps our brave new digital world 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 - and 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.