After more than four years of quantitative easing in the United States, the inflation rate as measured by the consumer price index is just 2%. (According to other measures, it may be even lower.) And XAU is tanking.

What happened to the trillions of dollars in global liquidity injected by central banks across the world? Where is the hyperinflation?

Printing Money

Under Quantitative Easing, the Fed buys Treasury Notes or Mortgage-backed securities for bank reserves in the private sector. This changes the composition of private sector financial assets (swapping low-interest T-bonds for even-lower-interest reserves) but does not add to the supply of private-bank issued money [1].

The private sector will not be able to access more capital, nor does QE necessarily lead to more lending. It just lowers interest rates and makes riskier assets more attractive.

On the other hand, government bond sales and deficit spending result in the creation of a net financial asset.

Unlike a private loan issuance, which creates both a private sector liability and an asset, government deficit spending results in no corresponding private sector liability (the US Treasury will never default), only a private sector asset (the government bond).

Just how much money has been created ex nihilo? A lot.

Hyperinflation

It won’t happen as a result of Quantitative Easing or Deficit Spending.

Hyperinflation is caused by the complete rejection of a nation’s money. Throughout history, hyperinflations have tended to occur not because the money supply expands, but because of unusual exogenous factors such as a decline in production, corruption, regime changes, ceding of monetary sovereignty or loss of a war [2].

So Where Did the Money Go?

Probably the bond market.

The Price of Gold

Nobody knows. What are you going to look at, cash flow and earnings?

Central banks control most of the gold in the world and have been net buyers since 2008. Right now rumor has it that Cyprus may sell gold to fund its bailout, but their €400m sale is nothing compared to what Paulson might be holding.

The Value of Fiat Money

Fiat money has acceptance value because the government and people deem it as an accepted medium of exchange. It has no intrinsic value. But you know what else has no intrinsic value? Gold. Oh, and Bitcoin.

See Also:

1. Understanding the Modern Monetary System –PragCap via SSRN

2. Hyperinflations, Hysteria, and False Memories –GMO

3. 12 Rules of Goldbuggery — When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!

4. The death of inflation –The Economist