With the World Stock Markets Crashing — Should We Print More Money?

Spend Matters welcomes a new regular contributor, Nick Peksa, of Mintec Ltd.

The recent drops in the world stock markets have wiped off between $2.5 - $4 trillion from world stock markets. Concern has been growing over the debt crisis in Europe spreading, with Italy and Spain both now said to be heading into debt crisis. Worries about the US economy slowing have also had a negative effect on the markets fearing it could have a knock on impact across the rest of the global economy. This was compounded by the credit rating agency (Standard and Poor's) dropping the US credit rating from AAA to AA+ for the first time in its history.

To try and combat this downward trend, the US Federal Reserve announced on recently that they will keep the interest rate between 0% and 1/4% until 2013. The markets remain uncertain for the time being amid the on-going fears of the European debt crisis and fears that the Federal Reserve did not announce any measures to boost the US economy. Why don't we print some more money?

In reality, I have no idea what effect printing bank notes would have however; it certainly makes an interesting introduction to the commodities behind cold hard cash.

Materials used to produce banknotes

Worldwide, most banknotes (over 96%) are made of cotton paper. Cotton can be mixed with other fibres like linen or abaca, such as in the United States where currency is composed of 75% cotton and 25% linen.

On any one day, millions of banknotes can be produced. For example in 2010 the Bureau of Engraving and Printing in United States produced around 26 million banknotes a day (the approximated value is $974 million). But in reality only a small percentage of the cotton crops are used for this production. It is around 0.20% of a harvested area in the US (calculated from cotton production for 2009 -- 12,188,000 bales and an amount of cotton used to produce banknotes in 2009 -- 21,476 bales).

To provide a couple of interesting facts it costs the various banks of the world the following to produce their notes:

  • Bank of England spends around 5.11 pence per note
  • New Zealand spends about 5.3 cents per note (plastic notes)
  • Switzerland spends around 30 centimes per note

The cotton industry and factors influencing prices

The cotton industry all starts with the crops of cotton, which are situated across the world in tropical and subtropical climates. The biggest producer of this commodity is China (33,000 bales of approximately 220kg), where cotton crops are allocated within 24 of the 31 provinces, followed by India (27,000 bales) and the USA (18,000 bales). However, China is not the biggest exporter of cotton -- the largest amount of cotton is exported from the USA (13,500 bales), India (4,800 bales), Brazil (4,500 bales) and Australia (4,500 bales).

The reason China is not exporting large amounts of these fibres is because while the production in China is gradually increasing over the last 30 years, the demand and therefore consumption in this country has also increased and is now even higher than the resources provided by the country, unlike in the United States where consumption since 1980 has been rather constant (around 1-2 million tonnes) and the production even between 2 and 6 million tonnes, but never dropping to the level that is not enough to supply this country's requirements.

The textile producers have raised their prices dramatically since the beginning of 2011, and there are two important reasons for this. The first is the increase in energy, gas and labour costs, and shipping and freight, which has reached up to four times higher prices than in 2010.

The second is the high price of cotton. This is connected with a drastic increase in demand both from Western countries and from developing ones (China, India, Pakistan, and Bangladesh). In addition, suppliers have suffered some drops in their harvests during this year which were caused by poor weather conditions. For example, floods in Pakistan in July 2010 caused by heavy monsoon rains and in August 2010 a flood in China had destructive results. At the end of 2010 very heavy rain in Australia brought huge problems for a lot of agricultural producers who suffered crop losses.

All of these facts along with the lowest cotton stock in United States for the last 50 years and of higher costs of transportation resulted in an increase of cotton prices of about 93% for June 2010 – June 2011. Situations like this are called "perfect storms" where multiple effects hit the market simultaneously.

However, demand is down as people have switched to synthetic fibres, global output is expected to increase a further 8% in the 2011/12 season to 26.8m tonnes, due to farmers in the Northern Hemisphere switching to planting cotton all combined with the fact that top producers India and China have been experiencing favourable weather. Could this be a "perfectly sunny day"?


Even though it only tables a few cents, pence or centimes to produce a note there is also a lot of work, security issues and labour that goes into them.Given the recent crashes in cotton prices maybe banks and stock brokers are not the only reason the price of our cash has devalued.

- Nick Peksa, Mintec, Ltd. (with contributors Monika Sosnowska and Steve Vearling)

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