Just below the Langeberg mountains past the town of Swellendam, there is a farm stall and restaurant called Rolandale. It is a popular lay-by for travellers on the N2 highway from Cape Town to the Southern Cape and we regularly have Sunday breakfast there.
They serve a cappuccino which is topped with a tower of froth that somehow defies gravity. This past Sunday, while waiting for the tower to fall or succumb to the gentle chilly Overberg breeze, I wondered how much of the serving was froth and how much was coffee.
It struck me that this was very similar to the global economy: how much of it is froth, and how much is substance. Froth is the liquidity, or “money” in the world, that has been created by financial instruments such as derivatives and other forms of speculative “money” trading. Substance is created by tangible value being added in the production of goods and services. If derivatives expert and author Satyajit Das is to be believed, only about 30% of world liquidity today is substance and the rest is froth.
Staring at my Rolandale special, I imagine that the two thirds froth has within it billions of tiny organisms all engaged in tasks based on nothing. I imagine too the hardship that could follow for every individual if, in trying to get to the substance below, we simply blow off all the froth and all of the activities it contains. Perhaps best to remove the froth spoon by spoon by changing government deficits to surpluses until we get to the real coffee. Some bankers believe this could take up to 20 years.
We could, of course, just mix the froth with the coffee, and dilute the whole mixture, albeit with some spill. This would dilute the value of money and leave us with hyper-inflation.
I think next time, I’ll order cappuccino with cream, or maybe settle for a plain filter coffee with no milk.