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The Price of Time
The first book of the next crisis.*Winner of the 2023 Hayek Book Prize**Longlisted for the 2022 Financial Times Business Book of the Year Award*All economic and financial activities take place across time. Interest coordinates these activities. The story of capitalism is thus the story of the price that individuals, companies and nations pay to borrow money.In The Price of Time, Edward Chancellor traces the history of interest from its origins in ancient Mesopotamia, through debates about usury in Restoration Britain and John Law ' s ill-fated Mississippi scheme, to the global credit booms of the twenty-first century. We generally assume that high interest rates are harmful, but Chancellor argues that, whenever money is too easy, financial markets become unstable. He takes the story to the present day, when interest rates have sunk lower than at any time in the five millennia since they were first recorded - including the extraordinary appearance of negative rates in Europe and Japan - and highlights how this has contributed to profound economic insecurity and financial fragility.Chancellor reveals how extremely low interest rates not only create asset price inflation but are also largely responsible for weak economic growth, rising inequality, zombie companies, elevated debt levels and the pensions crises that have afflicted the West in recent years - conditions under which economies cannot possibly thrive. At the same time, easy money in China has inflated an epic real estate bubble, accompanied by the greatest credit and investment boom in history. As the global financial system edges closer to yet another crisis, Chancellor shows that only by understanding interest can we hope to face the challenges ahead.
432 pages, Hardcover
First published August 16, 2022
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Displaying 1 - 30 of 163 reviews
August 23, 2022
Useful read. Greatly improved my capacity to be boring at parties.
August 24, 2022
The Price of Time, in the best case, is a misnomer. The book is not a story of interest rates despite the occasional attempts to weave them into the narrative. Its first part provides summaries of a few most celebrated historic bubbles, followed by a long, unstructured diatribe on the state of current markets, economic structures, and policy frameworks.
There is nothing wrong with these topics. The author's attempts fall short because of how the content appears manipulated, like the title of the book, to emphasize his discomfort with the way things are. The author is right in pointing out numerous current ills from the extreme and rising inequality to market valuations, corporate abuses and policy adventurism, real-life reflexivities of financial events and externalities including climate damage, etc.
The author is not alone in listing these issues. These topics are covered continuously by a rising horde in a far more effective manner almost daily in books and journals. This book has little primary research. Worse, its reliance on the points made by others is so inconsistent that the arguments often lose credibility.
For instance, the author would lament the lack of creative destruction in one paragraph but have long sections on individual companies that go bust. He would appear to favor the Austrian school of thought and Hayek, but still, have digs at Greenspan's connections with Ayn Rand or the regulatory failures in controlling the powers of today's giants in some other sections.
The inconsistencies are worse when the author discusses two sides of any interest rate level. The book would criticize how low rates hurt the pensioners relying on interest income, but mind savers benefiting from rising wealth levels of financial instruments. The author never realizes how much the two groups overlap and why retirees worldwide have not gone up in arms against low-interest rates decades later. Take another argument in the same vein: the author would criticize low-interest rates for luring students and consumers of all types to borrow but would still want funding available to these groups all the time for the betterment of the masses.
Once again, the conclusions are not wrong. The problem is the ad hocism in the arguments used to support them. It is ok to use quotes from both Marx and Smith or Keynes and Mises to point out any unsustainability, but when it happens too often, it all begins to jangle. For example, the author does not like central banks because of their lack of policy framework. He seems to believe in the Austrian worldview that argues against fiat money, seen as the leading cause of the boom-bust cycle in the prices of financial assets and possibly also real-life goods/services. The book does not like cryptocurrencies, though - and for all the right reasons. Somehow, the author sees a solution in government-issued digital currencies...go figure!
The damage because of the lack of consistent argument framework is most when the author has to turn prescriptive. Mercifully, the book has little to offer on alternatives, although there is a section full of platitudes at the end.
A final word: History provides hardly any examples of economic successes without attendant financial/property market boom-busts, a point that goes unacknowledged. Every bubble-bust-prone system has not progressed consistently over the long term, but it is difficult to think of any society that has grown well over decades without boom-bust cycles. Unfortunately, perhaps.
There is nothing wrong with these topics. The author's attempts fall short because of how the content appears manipulated, like the title of the book, to emphasize his discomfort with the way things are. The author is right in pointing out numerous current ills from the extreme and rising inequality to market valuations, corporate abuses and policy adventurism, real-life reflexivities of financial events and externalities including climate damage, etc.
The author is not alone in listing these issues. These topics are covered continuously by a rising horde in a far more effective manner almost daily in books and journals. This book has little primary research. Worse, its reliance on the points made by others is so inconsistent that the arguments often lose credibility.
For instance, the author would lament the lack of creative destruction in one paragraph but have long sections on individual companies that go bust. He would appear to favor the Austrian school of thought and Hayek, but still, have digs at Greenspan's connections with Ayn Rand or the regulatory failures in controlling the powers of today's giants in some other sections.
The inconsistencies are worse when the author discusses two sides of any interest rate level. The book would criticize how low rates hurt the pensioners relying on interest income, but mind savers benefiting from rising wealth levels of financial instruments. The author never realizes how much the two groups overlap and why retirees worldwide have not gone up in arms against low-interest rates decades later. Take another argument in the same vein: the author would criticize low-interest rates for luring students and consumers of all types to borrow but would still want funding available to these groups all the time for the betterment of the masses.
Once again, the conclusions are not wrong. The problem is the ad hocism in the arguments used to support them. It is ok to use quotes from both Marx and Smith or Keynes and Mises to point out any unsustainability, but when it happens too often, it all begins to jangle. For example, the author does not like central banks because of their lack of policy framework. He seems to believe in the Austrian worldview that argues against fiat money, seen as the leading cause of the boom-bust cycle in the prices of financial assets and possibly also real-life goods/services. The book does not like cryptocurrencies, though - and for all the right reasons. Somehow, the author sees a solution in government-issued digital currencies...go figure!
The damage because of the lack of consistent argument framework is most when the author has to turn prescriptive. Mercifully, the book has little to offer on alternatives, although there is a section full of platitudes at the end.
A final word: History provides hardly any examples of economic successes without attendant financial/property market boom-busts, a point that goes unacknowledged. Every bubble-bust-prone system has not progressed consistently over the long term, but it is difficult to think of any society that has grown well over decades without boom-bust cycles. Unfortunately, perhaps.
July 25, 2022
I finished this book on audio and went straight to my favorite internet book shop (adlibris, not amazon) to buy it in hard back. I will write a more complete review when I have re-read it. Needless to say, I found this absolutely fascinating.
The author takes us to the beginning of time, well, to the beginning of the history of interest. The interest was invented before money came into use. If you borrowed grain, you had to pay back with more grain. Interest is the price for the pain of possibly losing the lent money - or grain. It shouldn't be 0 or negative, that is a modern construction that bodes ill for the future. It floods the markets with poor investments, because the hunt for pay-back leads to risky investments. The zero interest is also what has caused the collapse of the old pension system. We've all been screwed over. Market unrest always follows a period of low interest.
This is one of the best financial books I've ever read and it gives astute insight into the world we live in today - and how we got into this mess. I can't wait to read it again!
The author takes us to the beginning of time, well, to the beginning of the history of interest. The interest was invented before money came into use. If you borrowed grain, you had to pay back with more grain. Interest is the price for the pain of possibly losing the lent money - or grain. It shouldn't be 0 or negative, that is a modern construction that bodes ill for the future. It floods the markets with poor investments, because the hunt for pay-back leads to risky investments. The zero interest is also what has caused the collapse of the old pension system. We've all been screwed over. Market unrest always follows a period of low interest.
This is one of the best financial books I've ever read and it gives astute insight into the world we live in today - and how we got into this mess. I can't wait to read it again!
November 7, 2023
Excellent book.
One important revelation: when interest rates get too low investors become restless. They are looking for an investment vehicle that will have a larger return. This is how some got involved in crypto speculation.
https://www.mauldineconomics.com/fron...
https://www.midlandbookshop.com/en/pr...
This is how we ended up with Bank-Man and the crypto disaster.
When I was covering Silicon Valley, i wrote a book titled "The Internet bubble," an international bestseller. But the suckers like to say "it's different this time."
One important revelation: when interest rates get too low investors become restless. They are looking for an investment vehicle that will have a larger return. This is how some got involved in crypto speculation.
https://www.mauldineconomics.com/fron...
https://www.midlandbookshop.com/en/pr...
This is how we ended up with Bank-Man and the crypto disaster.
When I was covering Silicon Valley, i wrote a book titled "The Internet bubble," an international bestseller. But the suckers like to say "it's different this time."
December 11, 2022
To be honest, I have mixed feelings regarding this book. Certainly, it doesn’t deserve such raving reviews it got because its quality and readability are very uneven. Nonetheless, it brought very interesting discussions and has an extensive bibliography if the reader desires to go deeper into the many topics it mentions.
The first half of the book starts strong by discussing the origins of interest at the dawn of western civilization in the Middle East: its various forms, its justifications throughout time and how it was linked with productive endeavors and religions to an extensive degree. Then it goes on to explore the role of interest during the Renaissance and the Modern Period, peppered with good anecdotes and biographies of financiers, merchants and economic thinkers. Finally, it explores the increasingly formal explanations around the role of monetary policy, a movement linked with the formalization of economics as a field of study. This is where the book really shines, in my view, as Chancellor is very capable of simplifying economic theories, presenting different views all the while keeping everything engaging. The chapters dealing with the late XIX up until the Great Depression, when the Gold Standard reigned and the likes of Wicksell, Keynes and Hayek were debating, are masterful.
Thereafter, the book takes a nosedive: as the chapters approach the present, the author increasingly relies on a barrage of quotes, citations and statements to make his points. Out of the window are the careful explanation and contrast of ideas that characterized the first half. Starting with the aftermath of the Volcker shock, the book gets increasingly disjointed with name dropping and repetition, a tool to try and convince the reader by exhaustion. Additionally, Chancellor attributes almost every identifiable economic malaise to recent monetary policy. While he raises some good questions, these sounds as a gross simplification for many complex problems, reasons other than artificially low interest rates barely getting a mention, if any. One is tempted to remember the quote about how someone armed only with a hammer sees the world.
I recommend this book for those interested in economic history and that want to have a nice overview of the evolution of monetary theory. This is specially so if you are familiar with macroeconomics and would like an extensive bibliography that explores the effects of interest rates on a multitude of themes. However, I would caution against getting your hopes as high as the cover reviews prompt you to.
The first half of the book starts strong by discussing the origins of interest at the dawn of western civilization in the Middle East: its various forms, its justifications throughout time and how it was linked with productive endeavors and religions to an extensive degree. Then it goes on to explore the role of interest during the Renaissance and the Modern Period, peppered with good anecdotes and biographies of financiers, merchants and economic thinkers. Finally, it explores the increasingly formal explanations around the role of monetary policy, a movement linked with the formalization of economics as a field of study. This is where the book really shines, in my view, as Chancellor is very capable of simplifying economic theories, presenting different views all the while keeping everything engaging. The chapters dealing with the late XIX up until the Great Depression, when the Gold Standard reigned and the likes of Wicksell, Keynes and Hayek were debating, are masterful.
Thereafter, the book takes a nosedive: as the chapters approach the present, the author increasingly relies on a barrage of quotes, citations and statements to make his points. Out of the window are the careful explanation and contrast of ideas that characterized the first half. Starting with the aftermath of the Volcker shock, the book gets increasingly disjointed with name dropping and repetition, a tool to try and convince the reader by exhaustion. Additionally, Chancellor attributes almost every identifiable economic malaise to recent monetary policy. While he raises some good questions, these sounds as a gross simplification for many complex problems, reasons other than artificially low interest rates barely getting a mention, if any. One is tempted to remember the quote about how someone armed only with a hammer sees the world.
I recommend this book for those interested in economic history and that want to have a nice overview of the evolution of monetary theory. This is specially so if you are familiar with macroeconomics and would like an extensive bibliography that explores the effects of interest rates on a multitude of themes. However, I would caution against getting your hopes as high as the cover reviews prompt you to.
November 20, 2023
I haven't been this conflicted on a book in, well, forever, really. It got to the point I had to re-read the whole thing to write this review - so make of it what you will.
So first of - the Kindle edition is simply broken, don't buy it. The footnotes are missing (all of them, they're just not in the book - and it's really painfull, I wanted to follow up on a lot of stuff), chapter navigation doesn't work, quite a few spelling mistakes, I found a repeat paragraph and Netscape is definitely not part of FAANG.
Now, I really enjoyed the first half of the book, which mostly covered the history of interest rates (after a criminally boring first chapter about interest in the ancient world). It filled a lot of gaps for me about the 17-19th century, its kind of unfortunate we sprinted through the 20th though, with just briefly touching up on selected topics. I recently read Jacob Goldsteins Money and it was very illuminating to read about the same events (John Law, Great Depression, Eurozone crisis) from a different perspective. I actually learned a lot - the author does a great job promoting the Austrian school of economics and thinkers outside the mainstream like Borio or McKinnon.
So that's the good part, but after that the book devolves into loosely blaming all ills of the financial world - M&A industry monopolization, PE raiders, zombie companies, wealth inequality, unicorns, financial bubbles - on central banks and low interest rates. The thing is - I actually believe the premise is correct, but the argumentation is so one sided, based on cherry picked anecdotes, that it feels like reading zerohedge, and at times borders on conspiracy theory territory level. Its entartaining but it's not rigorous analysis. I don't want to argue with the book on specific points - but quite a few are contentious.
There is a lot to like here - critique of price stability mandates, eye-opening comparison of 'secular stagnation' calls being made during both the GD and GR - all great stuff. And if you're new to this topic you will love the rest of the book and be easily convinced to what the author is selling - but there is more to the topic, everything is always more complicated than it seems and simple answers are usually the wrong ones.
So first of - the Kindle edition is simply broken, don't buy it. The footnotes are missing (all of them, they're just not in the book - and it's really painfull, I wanted to follow up on a lot of stuff), chapter navigation doesn't work, quite a few spelling mistakes, I found a repeat paragraph and Netscape is definitely not part of FAANG.
Now, I really enjoyed the first half of the book, which mostly covered the history of interest rates (after a criminally boring first chapter about interest in the ancient world). It filled a lot of gaps for me about the 17-19th century, its kind of unfortunate we sprinted through the 20th though, with just briefly touching up on selected topics. I recently read Jacob Goldsteins Money and it was very illuminating to read about the same events (John Law, Great Depression, Eurozone crisis) from a different perspective. I actually learned a lot - the author does a great job promoting the Austrian school of economics and thinkers outside the mainstream like Borio or McKinnon.
So that's the good part, but after that the book devolves into loosely blaming all ills of the financial world - M&A industry monopolization, PE raiders, zombie companies, wealth inequality, unicorns, financial bubbles - on central banks and low interest rates. The thing is - I actually believe the premise is correct, but the argumentation is so one sided, based on cherry picked anecdotes, that it feels like reading zerohedge, and at times borders on conspiracy theory territory level. Its entartaining but it's not rigorous analysis. I don't want to argue with the book on specific points - but quite a few are contentious.
There is a lot to like here - critique of price stability mandates, eye-opening comparison of 'secular stagnation' calls being made during both the GD and GR - all great stuff. And if you're new to this topic you will love the rest of the book and be easily convinced to what the author is selling - but there is more to the topic, everything is always more complicated than it seems and simple answers are usually the wrong ones.
August 16, 2022
So this book was straight-up amazing and I learned so much. However. I do have notes, and they mainly amount to Chancellor’s unquestioning faith in the fact that ‘growth must and should continue’ and that the uninterrogated concept of ‘productivity’ is the most important outcome measure of any economy. He attacks Piketty’s assumption of exponential return on capital, but seemed to miss Piketty’s wider point that the growth of the Industrial Revolution and post-world wars was abnormal in human history, and likely to soon return to its millennia-long baseline of less than 1% annually.
It did help me contextualise a lot of what I read that was written closer to things like the 1929 crash or the era of stagflation. For example, Keynes’ theory was that interest rates should be kept super low and this would result in wealth redistribution and social improvement. Instead, as Chancellor masterfully demonstrates, the ultra-low interest rates of the twenty-first century have resulted in: a grossly inflated wealth gap, redistribution to the 1% only, share buy-backs instead of investment, and overall a bad scene for anyone who’s not in the yacht class. Which, to give Keynes his due, was not necessarily the inevitable outcome, particularly if post-2008 the central banks had more closely followed Bagehot’s advice. (Bagehot wanted central banks to freely lend in a crisis, BUT at penal rates, against high quality collateral – a short term liquidity fix, in other words, that got you out of a hole but you didn’t want to continue for a second longer than necessary. Our banks have had it for over ten years now.)
I enjoyed the chronological approach to discussing interest rates, because Chancellor has the benefit of this century’s experience to be more balanced on the topic of ‘usury’ than Galbraith or Keynes or Locke. He quotes Irving Fisher explaining interest rates as a way of translating the future into the present, to reflect society’s overall time preference. He talks about the ‘natural’ rate in a much-needed critical fashion, ie: does it even exist? And beware that it is used in these econometric models if it does, in the same way economists think these models map directly on to real life. (Nope.) Bagehot thought interest rates were a barometer of trust, which is why, when they’re low, recklessness goes up with the easy money.
Chancellor then talks about Hayek (must add him to the TBR). Hayek didn’t think central bankers should stabilise prices, because this would lead to rapid technological development and a commodity glut. Stabilisation excessively stimulates output, which then drops as prices fall because there’s too much stuff made. We move on then to Goodhart’s law: when a measure becomes a target, it ceases to be a good measure (helloooooo, healthcare systems).
‘But factors that aren’t easily measured tend to get overlooked. As a result, the use of targets is
associated with a variety of adverse outcomes, including short-termism, the diversion of resources into
bureaucracy, risk aversion, unjustified rewards, and the undermining of institutional culture.’
‘Historian Jerry Muller adds a corollary to Campbell’s Law, namely: ‘anything that can be measured and
rewarded will be gamed.’’
He discusses the history of monetarism starting with the Louvre Accords of 1987 and summarises the US stagflation and the Japan bubble. In reality, he concludes, low interest rates fed demand for credit and fostered financial innovations like CDUs that increased supply. This was because you could get no yield on interest from government debt (bonds), so you had to find it elsewhere. In speculation.
Then, international credit was fragile because the US dollar is the global reserve economy. The Fed went for ultra-low interest rates, leading to a global credit boom. Other countries who kept their rates high saw huge capital flows seeking better returns. The Fed under Bernanke did not feel it was their responsibility to manage this.
‘The wealthiest homeowners pay the lowest mortgage rates ... There are two ways to interpret this relationship.
The first is to consider that the neediest borrowers are also the riskiest ... The second is to consider that the
neediest borrowers can be squeezed the hardest.’
By contrast, Borio feels that the largest influence on interest rates is monetary policy – not savings, investments, or demographics. Stable prices do not reliably reflect the ‘natural’ interest rate. Long term interest rates are strongly influenced by central banks rather than the market.
‘Amid all the heated commentary about greedy bankers and their ‘toxic’ securities, it is easy to overlook the fact
that subprime securities originally attracted investors because they enhanced income at a time when US interest
rates had fallen to historically low levels. Uncle Sam can stand many things, but he can’t stand 1 per cent.’
Key point.
In discussing 1929, I feel I start diverging ideologically from where Chancellor lands. He says the Great Depression propelled productivity and that recessions are ‘pit stops’ for increased efficiency; the ‘cleansing effect’ of businesses failing. And people dying and having an awful time, he doesn’t say. It did help me understand what happened in Europe post-2008, though; bad loans were just rolled over instead of taken off the books, and the low interest rates stopped ‘zombies’ from going into bankruptcy and in fact defaults on junk bonds dropped. Chancellor mentions that construction is a common ‘malinvestment’ seen when too much money is floating around, but he never clarifies what construction. I think this is important; ghost estates are a bad scene, but public works? Roads and railways? They’re an investment in the country’s future. I can’t call that ‘mal’ investment. I’m just not sure that’s what he means.
‘Schumpeter shared Hayek’s fears for the future. The bulk of the population, he thought, took improvements in
the standard of living for granted while resenting the insecurity produced by capitalism.’
… fair.
‘Good inequality fosters economic growth by providing incentives for people to improve their lot, whereas bad
inequality benefits a particular class (rent-seekers). Good inequality grows the economic pie, whereas bad
inequality is associated with stagnation.’
I mean. Dude. ‘Good’ inequality?!
Share buy-backs are a big unintended consequence of easy money. Low cost debt funds the repurchase of shares, and CEOs being given tranches of shares gives them a perverse incentive to increase share price, not output of the company. In 2008, US companies spent 50% of their profits on buybacks, which is insane by anyone’s measure. This leads to a situation wherein the 25 leading hedge fund managers earn FOUR TIMES the TOTAL INCOME of the S&P 500.
‘This was correct in a sense, according to transportation economist Hubert Horan: ‘What Uber has disrupted is
the idea that competitive consumer and capital markets will maximize overall economic welfare by rewarding
companies with superior efficiency. Its multibillion-dollar subsidies completely distorted marketplace price and
service signals, leading to a massive misallocation of resources.’’
‘In March 2018, Toys ‘R’ Us closed its doors. Back in 2005, the toy store had been acquired by a private equity
consortium. Weighed down with debt, management failed to adapt to online competition. The roll-out of new
megastores was deemed unaffordable and existing stores became shabby. Profits waned, leverage climbed, and
interest payments became pressing. The planned IPO was shelved. Toys ‘R’ Us was eventually put out of its
misery by a group of hedge funds, the owners of its secured debt, who reckoned it was worth more to them dead
than alive. Thirty-three thousand workers lost their jobs.’
‘Three years later, Tesla was valued at more than Toyota, even though the Japanese car maker produced over
twenty times as many vehicles.’
Because interest is the value of time, Chancellor says Tesla caused a wormhole in temporality. Ha.
He’s pure salty on Bitcoin and I’m here for it. He calls crypto ‘the perfect object of speculation’ because, with no interest rates or cash flow around it, rational valuation is impossible. It is too volatile to be a store of value, which is a key function of fiat currency, not to mention the transactions are slow and a climate disaster. It’s like other assets that produce no income – gold, cars, art.
What happens when the interest rates goes up? It will improve bank lending for mortgages to the little guy and reduce their liability for pensions. However, it will also kill zombie companies and with them, jobs; reduce corporate profits (cry); reduce stock and real estate prices; increase the cost of servicing public debt; and reignite emerging market and the Eurozone sovereign debt crises.
It was also fascinating to hear the economic explanation of the Arab Spring. Industrial commodities but also food were trading at bubble levels, and world cereal prices increased by 29%. Tunisia is one of the world’s biggest food importers, and Mohamed Bouazizi was a food seller. It started as a bread riot.
Chancellor concludes with the point that quantitative easing essentially means far more government involvement and backdoor banking nationalisation. Negative interest rates are a tax on capital and may result in a fully cashless world, which will be destructive to privacy and liberty. He then rushes to say that a digital gold standard might reattach interest rates to savings, reflect supply and demand more accurately, and help rates find their ‘natural’ level … a thing he’s already said doesn’t exist. Hmm.
‘Like Bastiat, Hazlitt lamented the persistent tendency of men to see only the immediate effects of any given
policy, or its effects on only a special group, and to neglect to inquire what the long-run effects of that policy
will be not only on the special group but on all groups. It is the fallacy of overlooking secondary consequences.’
I mean. This is a quote from his own book, reminding him of the very same point!
Some LOLs:
‘This may be an early example of subsidized public lending, or perhaps the temples attracted a better class of
debtor – after all, no one wants to default to a god. Higher rates on barley loans possibly reflected the fact that
such loans were made at times when corn was scarce and that the loans were to be repaid after the harvest when
barley was cheap and abundant.’
‘After Augustus’ death, the Emperor Tiberius hoarded money, with the result that interest rates rose above the legal limit and a banking crisis erupted in AD 33. Tiberius then decided to lend out the imperial treasure free of interest to patrician families, which brought about an immediate decline in interest rates and an end to the crisis. His actions constituted the world’s first experience of quantitative easing.’
‘Law’s biographer Antoin Murphy wrote in the wake of the global financial crisis. ‘From this perspective, it may
be argued that, notwithstanding the failure of the Mississippi System, Law’s banking successors have been Ben
Bernanke, Janet Yellen and Mario Draghi.’’
SAAAALTY.
‘By the early twenty-first century, interest had been charged on loans for around five thousand years, possibly
longer. Interest had survived biblical injunctions, Aristotelian outrage and the onslaught of medieval canonists
and modern socialists. Over the millennia borrowers had always had to pay something for the use of other
people’s wealth. Up to this date, bond yields had only dipped below zero on a couple of occasions, and that was
due only to regulatory and fiscal quirks.’
Sigh. Sigh. Sigh.
It did help me contextualise a lot of what I read that was written closer to things like the 1929 crash or the era of stagflation. For example, Keynes’ theory was that interest rates should be kept super low and this would result in wealth redistribution and social improvement. Instead, as Chancellor masterfully demonstrates, the ultra-low interest rates of the twenty-first century have resulted in: a grossly inflated wealth gap, redistribution to the 1% only, share buy-backs instead of investment, and overall a bad scene for anyone who’s not in the yacht class. Which, to give Keynes his due, was not necessarily the inevitable outcome, particularly if post-2008 the central banks had more closely followed Bagehot’s advice. (Bagehot wanted central banks to freely lend in a crisis, BUT at penal rates, against high quality collateral – a short term liquidity fix, in other words, that got you out of a hole but you didn’t want to continue for a second longer than necessary. Our banks have had it for over ten years now.)
I enjoyed the chronological approach to discussing interest rates, because Chancellor has the benefit of this century’s experience to be more balanced on the topic of ‘usury’ than Galbraith or Keynes or Locke. He quotes Irving Fisher explaining interest rates as a way of translating the future into the present, to reflect society’s overall time preference. He talks about the ‘natural’ rate in a much-needed critical fashion, ie: does it even exist? And beware that it is used in these econometric models if it does, in the same way economists think these models map directly on to real life. (Nope.) Bagehot thought interest rates were a barometer of trust, which is why, when they’re low, recklessness goes up with the easy money.
Chancellor then talks about Hayek (must add him to the TBR). Hayek didn’t think central bankers should stabilise prices, because this would lead to rapid technological development and a commodity glut. Stabilisation excessively stimulates output, which then drops as prices fall because there’s too much stuff made. We move on then to Goodhart’s law: when a measure becomes a target, it ceases to be a good measure (helloooooo, healthcare systems).
‘But factors that aren’t easily measured tend to get overlooked. As a result, the use of targets is
associated with a variety of adverse outcomes, including short-termism, the diversion of resources into
bureaucracy, risk aversion, unjustified rewards, and the undermining of institutional culture.’
‘Historian Jerry Muller adds a corollary to Campbell’s Law, namely: ‘anything that can be measured and
rewarded will be gamed.’’
He discusses the history of monetarism starting with the Louvre Accords of 1987 and summarises the US stagflation and the Japan bubble. In reality, he concludes, low interest rates fed demand for credit and fostered financial innovations like CDUs that increased supply. This was because you could get no yield on interest from government debt (bonds), so you had to find it elsewhere. In speculation.
Then, international credit was fragile because the US dollar is the global reserve economy. The Fed went for ultra-low interest rates, leading to a global credit boom. Other countries who kept their rates high saw huge capital flows seeking better returns. The Fed under Bernanke did not feel it was their responsibility to manage this.
‘The wealthiest homeowners pay the lowest mortgage rates ... There are two ways to interpret this relationship.
The first is to consider that the neediest borrowers are also the riskiest ... The second is to consider that the
neediest borrowers can be squeezed the hardest.’
By contrast, Borio feels that the largest influence on interest rates is monetary policy – not savings, investments, or demographics. Stable prices do not reliably reflect the ‘natural’ interest rate. Long term interest rates are strongly influenced by central banks rather than the market.
‘Amid all the heated commentary about greedy bankers and their ‘toxic’ securities, it is easy to overlook the fact
that subprime securities originally attracted investors because they enhanced income at a time when US interest
rates had fallen to historically low levels. Uncle Sam can stand many things, but he can’t stand 1 per cent.’
Key point.
In discussing 1929, I feel I start diverging ideologically from where Chancellor lands. He says the Great Depression propelled productivity and that recessions are ‘pit stops’ for increased efficiency; the ‘cleansing effect’ of businesses failing. And people dying and having an awful time, he doesn’t say. It did help me understand what happened in Europe post-2008, though; bad loans were just rolled over instead of taken off the books, and the low interest rates stopped ‘zombies’ from going into bankruptcy and in fact defaults on junk bonds dropped. Chancellor mentions that construction is a common ‘malinvestment’ seen when too much money is floating around, but he never clarifies what construction. I think this is important; ghost estates are a bad scene, but public works? Roads and railways? They’re an investment in the country’s future. I can’t call that ‘mal’ investment. I’m just not sure that’s what he means.
‘Schumpeter shared Hayek’s fears for the future. The bulk of the population, he thought, took improvements in
the standard of living for granted while resenting the insecurity produced by capitalism.’
… fair.
‘Good inequality fosters economic growth by providing incentives for people to improve their lot, whereas bad
inequality benefits a particular class (rent-seekers). Good inequality grows the economic pie, whereas bad
inequality is associated with stagnation.’
I mean. Dude. ‘Good’ inequality?!
Share buy-backs are a big unintended consequence of easy money. Low cost debt funds the repurchase of shares, and CEOs being given tranches of shares gives them a perverse incentive to increase share price, not output of the company. In 2008, US companies spent 50% of their profits on buybacks, which is insane by anyone’s measure. This leads to a situation wherein the 25 leading hedge fund managers earn FOUR TIMES the TOTAL INCOME of the S&P 500.
‘This was correct in a sense, according to transportation economist Hubert Horan: ‘What Uber has disrupted is
the idea that competitive consumer and capital markets will maximize overall economic welfare by rewarding
companies with superior efficiency. Its multibillion-dollar subsidies completely distorted marketplace price and
service signals, leading to a massive misallocation of resources.’’
‘In March 2018, Toys ‘R’ Us closed its doors. Back in 2005, the toy store had been acquired by a private equity
consortium. Weighed down with debt, management failed to adapt to online competition. The roll-out of new
megastores was deemed unaffordable and existing stores became shabby. Profits waned, leverage climbed, and
interest payments became pressing. The planned IPO was shelved. Toys ‘R’ Us was eventually put out of its
misery by a group of hedge funds, the owners of its secured debt, who reckoned it was worth more to them dead
than alive. Thirty-three thousand workers lost their jobs.’
‘Three years later, Tesla was valued at more than Toyota, even though the Japanese car maker produced over
twenty times as many vehicles.’
Because interest is the value of time, Chancellor says Tesla caused a wormhole in temporality. Ha.
He’s pure salty on Bitcoin and I’m here for it. He calls crypto ‘the perfect object of speculation’ because, with no interest rates or cash flow around it, rational valuation is impossible. It is too volatile to be a store of value, which is a key function of fiat currency, not to mention the transactions are slow and a climate disaster. It’s like other assets that produce no income – gold, cars, art.
What happens when the interest rates goes up? It will improve bank lending for mortgages to the little guy and reduce their liability for pensions. However, it will also kill zombie companies and with them, jobs; reduce corporate profits (cry); reduce stock and real estate prices; increase the cost of servicing public debt; and reignite emerging market and the Eurozone sovereign debt crises.
It was also fascinating to hear the economic explanation of the Arab Spring. Industrial commodities but also food were trading at bubble levels, and world cereal prices increased by 29%. Tunisia is one of the world’s biggest food importers, and Mohamed Bouazizi was a food seller. It started as a bread riot.
Chancellor concludes with the point that quantitative easing essentially means far more government involvement and backdoor banking nationalisation. Negative interest rates are a tax on capital and may result in a fully cashless world, which will be destructive to privacy and liberty. He then rushes to say that a digital gold standard might reattach interest rates to savings, reflect supply and demand more accurately, and help rates find their ‘natural’ level … a thing he’s already said doesn’t exist. Hmm.
‘Like Bastiat, Hazlitt lamented the persistent tendency of men to see only the immediate effects of any given
policy, or its effects on only a special group, and to neglect to inquire what the long-run effects of that policy
will be not only on the special group but on all groups. It is the fallacy of overlooking secondary consequences.’
I mean. This is a quote from his own book, reminding him of the very same point!
Some LOLs:
‘This may be an early example of subsidized public lending, or perhaps the temples attracted a better class of
debtor – after all, no one wants to default to a god. Higher rates on barley loans possibly reflected the fact that
such loans were made at times when corn was scarce and that the loans were to be repaid after the harvest when
barley was cheap and abundant.’
‘After Augustus’ death, the Emperor Tiberius hoarded money, with the result that interest rates rose above the legal limit and a banking crisis erupted in AD 33. Tiberius then decided to lend out the imperial treasure free of interest to patrician families, which brought about an immediate decline in interest rates and an end to the crisis. His actions constituted the world’s first experience of quantitative easing.’
‘Law’s biographer Antoin Murphy wrote in the wake of the global financial crisis. ‘From this perspective, it may
be argued that, notwithstanding the failure of the Mississippi System, Law’s banking successors have been Ben
Bernanke, Janet Yellen and Mario Draghi.’’
SAAAALTY.
‘By the early twenty-first century, interest had been charged on loans for around five thousand years, possibly
longer. Interest had survived biblical injunctions, Aristotelian outrage and the onslaught of medieval canonists
and modern socialists. Over the millennia borrowers had always had to pay something for the use of other
people’s wealth. Up to this date, bond yields had only dipped below zero on a couple of occasions, and that was
due only to regulatory and fiscal quirks.’
Sigh. Sigh. Sigh.
This entire review has been hidden because of spoilers.
January 21, 2023
A very good book overall, whose theme for today is “easy money is a drug,” while backing that up with a 4,000 year look at the history of interest rates, tied to discussions of what is a “normal” rate of interest, if there is such a thing, and other factors. The title comes from people as far back as Adam Smith or further nothing that interest was the price people paid on time discounting returns, especially if said time involves risk or anxiety.
NOTE: Goodreads has two different listings for this book, one with Chancellor's name misspelled, which I didn't notice until I posted my review there. Given what I said about "lowball reviewers," I'm leaving that one up.
Ideally, I’d rate this 4.5 stars, but it deserves the bump up.
Chancellor first goes back to antiquity and the first use of interest, predating Hammurabi’s Code by centuries. He notes, like Michael Hudson, that debt jubilees far preceded their biblical establishment, BUT gives some details that Hudson doesn’t.
One is that they weren’t on a 50-year or whatever cycle. Instead, a new king implemented them to cut social unrest, etc. Like new Caesars paying off the Pretorians. Second, there were two types of debt — barley-based, which were generally “consumer” loans in today’s terms, and silver-based, which were “commercial” loans. Only the barley loans were forgiven. Third, a new king wasn’t guaranteed to do this.
From there, he looks at debt, interest and definitions of usury around the ancient eastern Mediterranean, with some excursion into China. (India doesn’t make his radar screen for whatever reasons.)
Then, he starts early modern history where knowledgeable people would expect: John Law and the Mississippi Bubble, with details on just how bubbly it was. From there, it’s off to Walter Bagehot, his Bank of England as “lender of last” resort and just how much that’s abused in modern times. That includes even abuse in Switzerland, regarded throughout the Western world as a model of probity. Along the way, he loops in discussions on economists in the 1600s, notes on how “easy money” led to Fugger wealth and more.
NOTE: Chinese tankies will HATE this book because of the chapter “Financial Repression with Chinese characteristics.”
Samples:
Refuting people who challenge Chancellor's ideas on easy money? Chancellor’s short and sweet discursion on Iceland eating its shit, taking its haircut, and doing well today.
Finally, in his postscript, Chancellor speculates if central banks will offer their own digital currencies to drive out private crypto.
I don’t think I’d ever even read a newspaper piece by him before. But, per Chancellor’s Wiki page, he is indeed insightful. His political positions would seem to be, in US terms, mainstream liberal to the left side of that, and minus most neoliberalism. And, per his previous two books also ultimately being about bubbles, the global economy is either going to be facing a Long Unwinding, if the Fed holds the course, or else more Fake Growth. That said, while he got the last three global bubbles right, his defense of voting Leave, and calling out economists who warned about its problems, appear to have been more miss than hit on the prognostication side.
NOTE: Goodreads has two different listings for this book, one with Chancellor's name misspelled, which I didn't notice until I posted my review there. Given what I said about "lowball reviewers," I'm leaving that one up.
Ideally, I’d rate this 4.5 stars, but it deserves the bump up.
Chancellor first goes back to antiquity and the first use of interest, predating Hammurabi’s Code by centuries. He notes, like Michael Hudson, that debt jubilees far preceded their biblical establishment, BUT gives some details that Hudson doesn’t.
One is that they weren’t on a 50-year or whatever cycle. Instead, a new king implemented them to cut social unrest, etc. Like new Caesars paying off the Pretorians. Second, there were two types of debt — barley-based, which were generally “consumer” loans in today’s terms, and silver-based, which were “commercial” loans. Only the barley loans were forgiven. Third, a new king wasn’t guaranteed to do this.
From there, he looks at debt, interest and definitions of usury around the ancient eastern Mediterranean, with some excursion into China. (India doesn’t make his radar screen for whatever reasons.)
Then, he starts early modern history where knowledgeable people would expect: John Law and the Mississippi Bubble, with details on just how bubbly it was. From there, it’s off to Walter Bagehot, his Bank of England as “lender of last” resort and just how much that’s abused in modern times. That includes even abuse in Switzerland, regarded throughout the Western world as a model of probity. Along the way, he loops in discussions on economists in the 1600s, notes on how “easy money” led to Fugger wealth and more.
NOTE: Chinese tankies will HATE this book because of the chapter “Financial Repression with Chinese characteristics.”
Samples:
Refuting people who challenge Chancellor's ideas on easy money? Chancellor’s short and sweet discursion on Iceland eating its shit, taking its haircut, and doing well today.
Finally, in his postscript, Chancellor speculates if central banks will offer their own digital currencies to drive out private crypto.
I don’t think I’d ever even read a newspaper piece by him before. But, per Chancellor’s Wiki page, he is indeed insightful. His political positions would seem to be, in US terms, mainstream liberal to the left side of that, and minus most neoliberalism. And, per his previous two books also ultimately being about bubbles, the global economy is either going to be facing a Long Unwinding, if the Fed holds the course, or else more Fake Growth. That said, while he got the last three global bubbles right, his defense of voting Leave, and calling out economists who warned about its problems, appear to have been more miss than hit on the prognostication side.
March 21, 2023
This book started out well. The first half walks through a relatively chronological look at use of debt and interest through history.
Arriving at present times, one of the first chapters is a diatribe against stock buybacks. I can’t tell if the author is ignorant of the practice, or biased into oblivion, but in either case this chapter is appalling. As Buffett said in his 2023 Berkshire Hathaway shareholder letter, "When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
Next up, when lumping FAANG stocks into “speculative tech”, the author lists them as: Facebook, Apple, Amazon, NETSCAPE, and Google. How am I supposed to take this seriously when the author substitutes Netscape for Netflix? Additionally, assuming we’re discussing *real* FAANGs, these companies are not tulip bulbs, or NFTs - they’re cash generating machines. Implying that they’re propped up like the Chinese real estate market is disingenuous.
On the whole, this book is a collection of scattershot ideas, jaded political biases, questionable information, and underappreciated historical insights. At a little over half way through, I was asking myself, “Is it worth my time to finish this when I can’t trust basic facts, and the author clearly has a political agenda?” Now having finished the book, I wish I had trusted my gut.
Arriving at present times, one of the first chapters is a diatribe against stock buybacks. I can’t tell if the author is ignorant of the practice, or biased into oblivion, but in either case this chapter is appalling. As Buffett said in his 2023 Berkshire Hathaway shareholder letter, "When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
Next up, when lumping FAANG stocks into “speculative tech”, the author lists them as: Facebook, Apple, Amazon, NETSCAPE, and Google. How am I supposed to take this seriously when the author substitutes Netscape for Netflix? Additionally, assuming we’re discussing *real* FAANGs, these companies are not tulip bulbs, or NFTs - they’re cash generating machines. Implying that they’re propped up like the Chinese real estate market is disingenuous.
On the whole, this book is a collection of scattershot ideas, jaded political biases, questionable information, and underappreciated historical insights. At a little over half way through, I was asking myself, “Is it worth my time to finish this when I can’t trust basic facts, and the author clearly has a political agenda?” Now having finished the book, I wish I had trusted my gut.
January 1, 2023
The most important price in any economy – price of money over time i.e. interest.
In existence pretty much since recorded human history, it has been one of the most hotly debated topics. It has piqued the ‘interest’ not only of businesses, financiers and governments, but also of religious institutions who have reviled the concept and mandated the wrath of God to discourage the practice. Yet, Interest has survived kings, wars, religions, economic models, and so on.
Edward Chancellor’s book, The Price of Time, gives a detailed overview on the evolution of interest across ages and civilisations. He brings forth the various debates for and against interest and how it has somehow managed to come up trumps, whether in a capitalist world or a socialist economy. It highlights how various forms of governments have consistently tried taming this bull, but with ill-consequences. Not surprisingly, for most of history, the issue has been about managing or avoiding high (real or perceived) interest rates, primarily driven by the social and political impact of the same on populations, and hence regimes.
One of the most important debates that Chancellor touches upon, is about assessing the correct interest level for an economy. Is it linked to the GDP growth or the return on capital earned by a business? How does one factor in risk? Should one let the market determine the right price of money, in which case questions of social order and economic stability come into play. Or should governments (or Central banks) simply mandate it, as has been the attempt for a few centuries now. It is a question which has eluded a clear answer till date.
A significant focus of the book is on the recent era of artificially managed, extra-ordinarily low interest rates. While the argument for quantitative easing has been consistently made for over 400 years, the cheap-money era truly started with Greenspan in USA spreading across to Japan. Post the dot-com bubble burst, cheap-money became endemic across the world as governments / central banks tried to avoid a recession at all costs. In Chancellor’s words, the monetary policy experts usurped the role of governments and made interest rate the single-most important tool to ensure financial and economic stability.
Chancellor presents multiples examples from history, the Mississippi Scheme, South Sea Bubble, Foreign Bonds mania, etc, that indicate that periods of financial recklessness do not occur at random. They have been found to be unequivocally linked to easy-money and low interest rates (simplistically read as low discount rate resulting in higher DCF values and hence valuation frenzies across asset classes). Despite the same, the Central bankers like Greenspan, Bernanke, Yellen and Draghi, chose to pick only those lessons from history which seemed convenient. And they drove interest rates not just to the ground, but some also to the other side of the zero-bound, penalising individuals and corporates alike for their savings. Economists like Bagehot, considered a favourite of Central bankers as he emphasised the role of an easy money policy in times of stress, also cautioned against keeping interest rates too low. Yet, this fact is conveniently ignored by the followers of the Bagehot Rule.
The Central bankers, in the author’s words, unwittingly walked into a self-fulfilling prophesy of low interest rates. The low rates led to rising indebtedness and hence need to keep rates low going forward. What was meant to be a mechanism to boost the economy, for the most parts remained a mechanism to boost the markets and asset owners, thereby further skewing the income and wealth inequality across the world.
In the book, Chancellor presents some of the impacts of the decades of the ultra-easy monetary policy, on different social, age and economic groups, including issues like inter-generational wealth transfer. The longer-term impact of these policies will still take decades to figure out. What makes it scarier is that we are already in the middle of a massive unwinding project, without even understanding the width and depth of the damage that we are seeking to undo.
The one other theme which stands out in the book is the role played by the low-interest rate regime in the growth of China. In the ten years to 2015, China accounted for ~50% of the total credit creation in the world. This easy money policy has led to a real estate and infrastructure led boom where many projects do not meet any reasonable commercial justification from a return-on-investment perspective (except at extremely low rates) but have led to the creation of a massive debt overhang. Now as the global economy slows down and the rates start to rise, the same ghost investments are likely come back to bite the Chinese economy, with potentially disastrous consequences for the world.
While generally critical of most institutions, Chancellor is generally appreciative of the Bank of International Settlements (BIS). The BIS has been constantly warning against the long-term consequences of the unbridled easy-money policy of the US Fed. Infact, the BIS has gone so far as to say that beyond a point, growth of a country’s financial system is a drag on productivity growth - as the financial system ceases to be an enabler but an end in itself. Interesting, as it is one of the least understood institutions in general financial markets.
Overall, quite a fascinating book about a rather technical topic. Lots of very interesting stories and nuggets, but with very little jargon. Sometimes it gets a bit tedious with numerous similar sounding examples being used to emphasise a point. But all in all, extremely instructive and thought-provoking.
In existence pretty much since recorded human history, it has been one of the most hotly debated topics. It has piqued the ‘interest’ not only of businesses, financiers and governments, but also of religious institutions who have reviled the concept and mandated the wrath of God to discourage the practice. Yet, Interest has survived kings, wars, religions, economic models, and so on.
Edward Chancellor’s book, The Price of Time, gives a detailed overview on the evolution of interest across ages and civilisations. He brings forth the various debates for and against interest and how it has somehow managed to come up trumps, whether in a capitalist world or a socialist economy. It highlights how various forms of governments have consistently tried taming this bull, but with ill-consequences. Not surprisingly, for most of history, the issue has been about managing or avoiding high (real or perceived) interest rates, primarily driven by the social and political impact of the same on populations, and hence regimes.
One of the most important debates that Chancellor touches upon, is about assessing the correct interest level for an economy. Is it linked to the GDP growth or the return on capital earned by a business? How does one factor in risk? Should one let the market determine the right price of money, in which case questions of social order and economic stability come into play. Or should governments (or Central banks) simply mandate it, as has been the attempt for a few centuries now. It is a question which has eluded a clear answer till date.
A significant focus of the book is on the recent era of artificially managed, extra-ordinarily low interest rates. While the argument for quantitative easing has been consistently made for over 400 years, the cheap-money era truly started with Greenspan in USA spreading across to Japan. Post the dot-com bubble burst, cheap-money became endemic across the world as governments / central banks tried to avoid a recession at all costs. In Chancellor’s words, the monetary policy experts usurped the role of governments and made interest rate the single-most important tool to ensure financial and economic stability.
Chancellor presents multiples examples from history, the Mississippi Scheme, South Sea Bubble, Foreign Bonds mania, etc, that indicate that periods of financial recklessness do not occur at random. They have been found to be unequivocally linked to easy-money and low interest rates (simplistically read as low discount rate resulting in higher DCF values and hence valuation frenzies across asset classes). Despite the same, the Central bankers like Greenspan, Bernanke, Yellen and Draghi, chose to pick only those lessons from history which seemed convenient. And they drove interest rates not just to the ground, but some also to the other side of the zero-bound, penalising individuals and corporates alike for their savings. Economists like Bagehot, considered a favourite of Central bankers as he emphasised the role of an easy money policy in times of stress, also cautioned against keeping interest rates too low. Yet, this fact is conveniently ignored by the followers of the Bagehot Rule.
The Central bankers, in the author’s words, unwittingly walked into a self-fulfilling prophesy of low interest rates. The low rates led to rising indebtedness and hence need to keep rates low going forward. What was meant to be a mechanism to boost the economy, for the most parts remained a mechanism to boost the markets and asset owners, thereby further skewing the income and wealth inequality across the world.
In the book, Chancellor presents some of the impacts of the decades of the ultra-easy monetary policy, on different social, age and economic groups, including issues like inter-generational wealth transfer. The longer-term impact of these policies will still take decades to figure out. What makes it scarier is that we are already in the middle of a massive unwinding project, without even understanding the width and depth of the damage that we are seeking to undo.
The one other theme which stands out in the book is the role played by the low-interest rate regime in the growth of China. In the ten years to 2015, China accounted for ~50% of the total credit creation in the world. This easy money policy has led to a real estate and infrastructure led boom where many projects do not meet any reasonable commercial justification from a return-on-investment perspective (except at extremely low rates) but have led to the creation of a massive debt overhang. Now as the global economy slows down and the rates start to rise, the same ghost investments are likely come back to bite the Chinese economy, with potentially disastrous consequences for the world.
While generally critical of most institutions, Chancellor is generally appreciative of the Bank of International Settlements (BIS). The BIS has been constantly warning against the long-term consequences of the unbridled easy-money policy of the US Fed. Infact, the BIS has gone so far as to say that beyond a point, growth of a country’s financial system is a drag on productivity growth - as the financial system ceases to be an enabler but an end in itself. Interesting, as it is one of the least understood institutions in general financial markets.
Overall, quite a fascinating book about a rather technical topic. Lots of very interesting stories and nuggets, but with very little jargon. Sometimes it gets a bit tedious with numerous similar sounding examples being used to emphasise a point. But all in all, extremely instructive and thought-provoking.
March 8, 2024
Stunning read - delves into the origins and evolution of the interest rate, its profound impact on economies throughout history, and its significance in recent economic experiment with zero rates. Previously interest rates were viewed as merely the price of money, it highlights how they facilitate transactions across time, making it a "price of time".
January 21, 2023
A very good book overall, whose theme for today is “easy money is a drug,” while backing that up with a 4,000 year look at the history of interest rates, tied to discussions of what is a “normal” rate of interest, if there is such a thing, and other factors. The title comes from people as far back as Adam Smith or further nothing that interest was the price people paid on time discounting returns, especially if said time involves risk or anxiety.
Ideally, I’d rate this 4.5 stars, but with it getting lowballed by two people, both of whom argue against Chancellor’s central premise that the “easy money is a drug,” and the Fed and other banks causing it — and argue wrongly — it gets bumped up rather than down to 4 stars.
Chancellor first goes back to antiquity and the first use of interest, predating Hammurabi’s Code by centuries. He notes, like Michael Hudson, that debt jubilees far preceded their biblical establishment, BUT gives some details that Hudson doesn’t.
One is that they weren’t on a 50-year or whatever cycle. Instead, a new king implemented them to cut social unrest, etc. Like new Caesars paying off the Pretorians. Second, there were two types of debt — barley-based, which were generally “consumer” loans in today’s terms, and silver-based, which were “commercial” loans. Only the barley loans were forgiven. Third, a new king wasn’t guaranteed to do this.
From there, he looks at debt, interest and definitions of usury around the ancient eastern Mediterranean, with some excursion into China. (India doesn’t make his radar screen for whatever reasons.)
Then, he starts early modern history where knowledgeable people would expect: John Law and the Mississippi Bubble, with details on just how bubbly it was. From there, it’s off to Walter Bagehot, his Bank of England as “lender of last” resort and just how much that’s abused in modern times. That includes even abuse in Switzerland, regarded throughout the Western world as a model of probity. Along the way, he loops in discussions on economists in the 1600s, notes on how “easy money” led to Fugger wealth and more.
NOTE: Chinese tankies will HATE this book because of the chapter “Financial Repression with Chinese characteristics.”
Samples:
Refuting the downvoters? Chancellor’s short and sweet discursion on Iceland eating its shit, taking its haircut, and doing well today.
Finally, in his postscript, Chancellor speculates if central banks will offer their own digital currencies to drive out private crypto.
I don’t think I’d ever even read a newspaper piece by him before. But, per Chancellor’s Wiki page, he is indeed insightful. His political positions would seem to be, in US terms, mainstream liberal to the left side of that, and minus most neoliberalism. And, per his previous two books also ultimately being about bubbles, the global economy is either going to be facing a Long Unwinding, if the Fed holds the course, or else more Fake Growth. That said, while he got the last three global bubbles right, his defense of voting Leave, and calling out economists who warned about its problems, appear to have been more miss than hit on the prognostication side.
Ideally, I’d rate this 4.5 stars, but with it getting lowballed by two people, both of whom argue against Chancellor’s central premise that the “easy money is a drug,” and the Fed and other banks causing it — and argue wrongly — it gets bumped up rather than down to 4 stars.
Chancellor first goes back to antiquity and the first use of interest, predating Hammurabi’s Code by centuries. He notes, like Michael Hudson, that debt jubilees far preceded their biblical establishment, BUT gives some details that Hudson doesn’t.
One is that they weren’t on a 50-year or whatever cycle. Instead, a new king implemented them to cut social unrest, etc. Like new Caesars paying off the Pretorians. Second, there were two types of debt — barley-based, which were generally “consumer” loans in today’s terms, and silver-based, which were “commercial” loans. Only the barley loans were forgiven. Third, a new king wasn’t guaranteed to do this.
From there, he looks at debt, interest and definitions of usury around the ancient eastern Mediterranean, with some excursion into China. (India doesn’t make his radar screen for whatever reasons.)
Then, he starts early modern history where knowledgeable people would expect: John Law and the Mississippi Bubble, with details on just how bubbly it was. From there, it’s off to Walter Bagehot, his Bank of England as “lender of last” resort and just how much that’s abused in modern times. That includes even abuse in Switzerland, regarded throughout the Western world as a model of probity. Along the way, he loops in discussions on economists in the 1600s, notes on how “easy money” led to Fugger wealth and more.
NOTE: Chinese tankies will HATE this book because of the chapter “Financial Repression with Chinese characteristics.”
Samples:
Refuting the downvoters? Chancellor’s short and sweet discursion on Iceland eating its shit, taking its haircut, and doing well today.
Finally, in his postscript, Chancellor speculates if central banks will offer their own digital currencies to drive out private crypto.
I don’t think I’d ever even read a newspaper piece by him before. But, per Chancellor’s Wiki page, he is indeed insightful. His political positions would seem to be, in US terms, mainstream liberal to the left side of that, and minus most neoliberalism. And, per his previous two books also ultimately being about bubbles, the global economy is either going to be facing a Long Unwinding, if the Fed holds the course, or else more Fake Growth. That said, while he got the last three global bubbles right, his defense of voting Leave, and calling out economists who warned about its problems, appear to have been more miss than hit on the prognostication side.
September 26, 2022
Extraordinario libro sobre la historia de uno de los conceptos más importantes de la actividad humana: la tasa de interés.
Este libro es un verdadero tour de force a lo largo del tiempo y de la geografía, no solo sobre la práctica desde los inicios de la humanidad de cobrar intereses por los préstamos y, en tiempos más recientes, sobre la importancia de la tasa de interés como el principal instrumento de política monetaria, sino sobre la evolución de la comprensión teórica del concepto y sus implicaciones (¿qué es la tasa de interés?, ¿cuál es su nivel adecuado?, ¿es ético cobrar intereses por los préstamos?...) así como el papel fundamental que juega para la coordinación de las actividades humanas a través del tiempo.
La tasa de interés, a final de cuentas, es el precio del tiempo y, como tal, refleja las preferencias y ayuda a guiar las decisiones de ahorro y de inversión de las personas, siempre y cuando pueda ser determinada libremente en el mercado. Algo que queda muy claro después de leer este libro es cómo la manipulación de la tasa de interés ha sido la causa de todas las grandes crisis económicas, desde la burbuja de los bonos de Mississippi en el siglo XVIII hasta la gran crisis financiera del 2007-2008. La mayoría de la gente piensa que las tasas de interés se deben mantener bajas para facilitar el crédito y promover la inversión y la actividad económica, pero se olvidan de las consecuencias negativas como la formación de burbujas especulativas, el desincentivo al ahorro y las inversiones improductivas.
Ahora que muchos expertos financieros y economistas opinan sobre la pertinencia de que los bancos centrales aumenten la tasa de interés para controlar la inflación, parecería que la pregunta adecuada es más bien si no se debería abandonar uno de los últimos vestigios de la planeación centralizada: la supuesta capacidad de los bancos centrales de definir la tasa de interés "correcta" para mantener una economía "equilibrada", es decir, inflación baja y altos niveles de empleo y de inversión, evitando al mismo tiempo las burbujas financieras. Si hay muy pocos economistas serios que piensen que los controles de precios son apropiados, no deja de ser irónico que la mayoría siga pensando que es conveniente y posible intentar controlar uno de los precios más importantes de la economía: la tasa de interés.
Este libro es un verdadero tour de force a lo largo del tiempo y de la geografía, no solo sobre la práctica desde los inicios de la humanidad de cobrar intereses por los préstamos y, en tiempos más recientes, sobre la importancia de la tasa de interés como el principal instrumento de política monetaria, sino sobre la evolución de la comprensión teórica del concepto y sus implicaciones (¿qué es la tasa de interés?, ¿cuál es su nivel adecuado?, ¿es ético cobrar intereses por los préstamos?...) así como el papel fundamental que juega para la coordinación de las actividades humanas a través del tiempo.
La tasa de interés, a final de cuentas, es el precio del tiempo y, como tal, refleja las preferencias y ayuda a guiar las decisiones de ahorro y de inversión de las personas, siempre y cuando pueda ser determinada libremente en el mercado. Algo que queda muy claro después de leer este libro es cómo la manipulación de la tasa de interés ha sido la causa de todas las grandes crisis económicas, desde la burbuja de los bonos de Mississippi en el siglo XVIII hasta la gran crisis financiera del 2007-2008. La mayoría de la gente piensa que las tasas de interés se deben mantener bajas para facilitar el crédito y promover la inversión y la actividad económica, pero se olvidan de las consecuencias negativas como la formación de burbujas especulativas, el desincentivo al ahorro y las inversiones improductivas.
Ahora que muchos expertos financieros y economistas opinan sobre la pertinencia de que los bancos centrales aumenten la tasa de interés para controlar la inflación, parecería que la pregunta adecuada es más bien si no se debería abandonar uno de los últimos vestigios de la planeación centralizada: la supuesta capacidad de los bancos centrales de definir la tasa de interés "correcta" para mantener una economía "equilibrada", es decir, inflación baja y altos niveles de empleo y de inversión, evitando al mismo tiempo las burbujas financieras. Si hay muy pocos economistas serios que piensen que los controles de precios son apropiados, no deja de ser irónico que la mayoría siga pensando que es conveniente y posible intentar controlar uno de los precios más importantes de la economía: la tasa de interés.
June 28, 2023
I was never really into making puzzle picture frames but I can imagine the feeling someone gets when they connect multiple pieces together and voila! The picture frame begins to become more clear, the resolution increases and the insight grows. This book gave me that feeling, usually with books who have a singular concept that tries to weave its way into so many often overstep. The jump from a novel concept into essentially becoming a "Theory of everything" is something I see all the time. This book was one of the first times where I believe the author is correct to tie in their premise into all of our lives. That premise which slowly forms in part II, is the enormous impact interest rates have of the economy, our economic behavior, our long term decision making and effectively our lives. I have noticed some reviews stating "This is not a book on interest rates but on bubbles". I am not sure you can separate the two, bubbles are created when interest rates are too low, creating tumors that swell up to sizes where there is no remediation but "Hope for the best". This author walks us through all of the biggest booms and busts from century to century, showing the same patterns repeat themselves over and over again except with newer technology. Same concept as the past with new technology but the same dumb, greedy and overly ambitious humans. I must say before I begin this review, the author almost lost me. Part one of the book is dry, it reads like an academic conference but remaining portions of the book are jam packed with insights that it makes you forget and more importantly forgive what the author put you through. Let's begin.
I have been fascinated with the last 15 years of economic global development particularly when the Fed stepped in and backstopped the market where we were seeing a supernova in bubbles. My review will focus on the last 15 years only because I have been trying to figure out something that feels off in terms of prices, housing costs, standard of living, food costs, rental costs etc. Over the past 15 years we have seen 100 million dollar homes, 200 million dollar homes, 35 million dollar cars, artwork that has sold for half a billion. At the same time, housing costs are so high in America you need 6 figures to be able to buy a home or decades of saving if not. It's fake money, fake valuations, fake assets, fake economic indicators. The entire economy has been an absolute fugazi as the Italians say. Interest rates being lowered to 0% effectively created an environment where a multitude of things happened, zombie businesses proliferating with no cash flow, no hope of even turning a profit but simply received funding. This is bad for a couple of reasons, it stalls innovation, since access to capital is so easy, it does not force companies to be innovative, effectively encouraging low growth and stagnation. It also creates monopolies where large multinational corporations can buyout all competitors or drive them out of business buy taking in more debt for mergers. This also has another effect. Stock buybacks, capitalism should revolve around creating goods and services the population wants to purchase, if they don't the company dies. Instead of creating good or services, the metrics can be gamed, corporations can take on debt because interest rates are 0%, cut worker pay or lay them off. Take the debt and buy back shares and inflate the stock price giving the executives windfalls of cash. Another consequence of this is monopolies can thrive in this environment, consolidating competition, raising prices and forcing consumers to buy their products because there are no other options. This is whats happening right now.
As interests rates went down to 0%, it effectively made the people having assets exceptionally more wealthy while pricing out the middle class and lower class out of their classes. This creates a large gap between upper middle class, the wealthy and everyone else. This is what the Fed's policy has done, interest rates being lowered to 0 along with citizens united being passed, giving the richest americans unlimited capital and the ability to use that capital for political gain has spouted a new generation of corruption that even the gilded age could not have fathomed. Legalized bribery is the norm and even then thats not good enough for the mega donors who have lobbied for the use of "Dark money". Money that you don't even know where its coming from. Interest rates being cut to 0% have forced people to chase yield instead of save, its damaged a generation of elderly individuals with very little they can get from savings.
This is important, central bankers have effectively tilted the game even further to the richest Americans. At the end of 2008 and the great recession, our solutions were to inject more debt and destabilization into the system. 0% interest rates for so long created an equilibrium where wall street would get annihilated if rates were even raised by 1%. This is why they raised rates and then quickly back tracked all throughout the 2010's. A generation of wealth went to the richest Americans and right now we're paying the price for it. Bank foreclosures, college foreclosures, real estate foreclosures.. You name it. The housing market is so insane right now that I feel bad for anyone trying to purchase a home because you will probably pay too high of a price or you will suffer from interest rates.
I feel like I did not do this book justice but I thought it was a great read, I could probably go on for another couple of paragraphs but I really should get back to work. Until next time, peace.
5 stars for me.
I have been fascinated with the last 15 years of economic global development particularly when the Fed stepped in and backstopped the market where we were seeing a supernova in bubbles. My review will focus on the last 15 years only because I have been trying to figure out something that feels off in terms of prices, housing costs, standard of living, food costs, rental costs etc. Over the past 15 years we have seen 100 million dollar homes, 200 million dollar homes, 35 million dollar cars, artwork that has sold for half a billion. At the same time, housing costs are so high in America you need 6 figures to be able to buy a home or decades of saving if not. It's fake money, fake valuations, fake assets, fake economic indicators. The entire economy has been an absolute fugazi as the Italians say. Interest rates being lowered to 0% effectively created an environment where a multitude of things happened, zombie businesses proliferating with no cash flow, no hope of even turning a profit but simply received funding. This is bad for a couple of reasons, it stalls innovation, since access to capital is so easy, it does not force companies to be innovative, effectively encouraging low growth and stagnation. It also creates monopolies where large multinational corporations can buyout all competitors or drive them out of business buy taking in more debt for mergers. This also has another effect. Stock buybacks, capitalism should revolve around creating goods and services the population wants to purchase, if they don't the company dies. Instead of creating good or services, the metrics can be gamed, corporations can take on debt because interest rates are 0%, cut worker pay or lay them off. Take the debt and buy back shares and inflate the stock price giving the executives windfalls of cash. Another consequence of this is monopolies can thrive in this environment, consolidating competition, raising prices and forcing consumers to buy their products because there are no other options. This is whats happening right now.
As interests rates went down to 0%, it effectively made the people having assets exceptionally more wealthy while pricing out the middle class and lower class out of their classes. This creates a large gap between upper middle class, the wealthy and everyone else. This is what the Fed's policy has done, interest rates being lowered to 0 along with citizens united being passed, giving the richest americans unlimited capital and the ability to use that capital for political gain has spouted a new generation of corruption that even the gilded age could not have fathomed. Legalized bribery is the norm and even then thats not good enough for the mega donors who have lobbied for the use of "Dark money". Money that you don't even know where its coming from. Interest rates being cut to 0% have forced people to chase yield instead of save, its damaged a generation of elderly individuals with very little they can get from savings.
This is important, central bankers have effectively tilted the game even further to the richest Americans. At the end of 2008 and the great recession, our solutions were to inject more debt and destabilization into the system. 0% interest rates for so long created an equilibrium where wall street would get annihilated if rates were even raised by 1%. This is why they raised rates and then quickly back tracked all throughout the 2010's. A generation of wealth went to the richest Americans and right now we're paying the price for it. Bank foreclosures, college foreclosures, real estate foreclosures.. You name it. The housing market is so insane right now that I feel bad for anyone trying to purchase a home because you will probably pay too high of a price or you will suffer from interest rates.
I feel like I did not do this book justice but I thought it was a great read, I could probably go on for another couple of paragraphs but I really should get back to work. Until next time, peace.
5 stars for me.
Read
November 1, 2022DNF. Not worth the time.
November 16, 2022
This was an absolute game-changer for me. Put in simple terms, this book is about the role of interest in a modern economy, and comes with the caveat that interest is an extremely complicated subject that even renowned world economists and scholars struggle to fully understand. (Sideboob comment: Making the sweeping generalization that high interest is rapacious or the blanket argument that the free market should dictate the interest rate betrays a childish understanding of how money, markets, geopolitical events, etc. work. More on this below.) In its most basic terms, interest can be defined as the cost of money over time which takes risk and trust into account. The rate of interest impacts behavior at all levels - from the mattress stuffing individual to the major conglomerate answering to its shareholders to the autocratic government wishing to maintain social order while counterbalancing import / export and debt concerns. Right or wrong, the reality is that all modern economies are overseen by central banks that exert some control over the rate of interest, though for various reasons the United States Federal Reserve (the Fed) ostensibly has the lion’s share of said control. Tabling for a moment the argument for letting the market set the rate of interest and taking for granted the wisdom of setting inflation at 2%, in a vacuum the basic downsides of an artificially low interest rate are the discouragement of savings, rapid credit expansion, and inflation; by the same token an interest rate that is too high results in economic contraction and a potential deflationary spiral. Today’s Fed uses the specter of said deflation, unemployment, and price instability to justify ultra low interest rates. The book’s main counterargument to the Fed’s monetary policy (since at least Greenspan’s tenure) is that artificially low rates result in the misallocation of capital and ultimately stifles long term economic growth in exchange for short term relief. Put another way, creative destruction and natural selection (which often happen during recessions and depressions) must be allowed to occur; the lack of fiscal responsibility and fortitude, as well as politics, keeps us in a state of perpetually low interest which begets lower interest until the day of reckoning when everyone sees the holes in the Emperor’s underwear. The impact of constant low rates is being felt again today, not only in the form of inflation, but also with the prevalence of zombie companies, especially in Silicon Valley: cheap / easy money keeps inefficient companies on life-support also allowing them to poach and retain talent that would be better served elsewhere; for families we saw the price of housing skyrocket due to a surge in paper wealth and low cost leveraging (i.e., cheap mortgages). The People’s Republic of China now faces a similar problem but on an even grander scale - there, households have no choice but to keep their money at state selected banks (chosen more on relationships than business acumen) with little or no legal option to take their money out of the country due to China’s laws precluding capital flight. Moreover, because artificially set interest rates reflect neither return on capital nor credit risk, China’s economy has suffered from the twin evils of capital misallocation and excessive debt. (Another sideboob: As the keeper of the world’s reserve currency, the US doesn’t need to maintain its own foreign-exchange reserves, nor worry about its balance of payments. There is no limit on how many dollars flow abroad nor how much the US borrows from foreigners. America can run ‘deficits without tears’. Over the years the US has taken advantage of this privilege to become the world’s largest international debtor.) The rampant speculation caused by artificially low rates has also found its way into cryptocurrencies, which is somewhat ironic considering that their inception (at least BTC) was originally designed to combat government fiat over money and inflation. What’s happened with crypto thus far has not been a new form of money but rather an ideal object of speculation that has almost become a caricature for financial impropriety and recklessness. Back to the notion of high interest rates equating to exploitation of the poor, the book also goes into sordid detail about how the periods of greatest inequality came during periods of abnormally low interest rates (see e.g., the meteoric rises of John Law, JD Rockefeller, Jeff Bezos, and most recently Elon Musk). One possible explanation is that the rich and the financially literate (e.g., investment bankers and financiers) are in much better positions to become large borrowers and to acquire assets when money is cheap. Throughout history, usury laws have “protected” borrowers by capping interest rates whereas there is no law (or even word) to describe the injustice of precluding lenders from being adequately compensated for their savings, especially when borrowers use that money to make a huge profit. The book concludes with an ardent statement about how, despite being a ‘capitalist nation, the US and the West in general accept central planning by allowing the control and manipulation of the most important price in a market based economy - the rate of interest. An economy in which risk is socialized is no longer capitalist. “Capitalism without bankruptcy is like Christianity without hell.” #thepriceoftime
May 31, 2023
"The Price of Time" written by Edward Chancellor is an exceptional read for those who are interested in finance and economics. This well-written book gives readers a deep understanding of the value of time, from both a historical and economic point of view.
The book is divided into several sections that explain different dimensions of time and its value. Chancellor has provided extensive research that is presented in an easy-to-understand way, making the book accessible for readers of all backgrounds. He provides examples of famous personalities throughout history who have recognized the value of time and how they managed it to achieve great things.
One of the great things about this book is that it encourages readers to reflect on their use of time and how it can impact their lives in significant ways. It has great insights into human behavior and how our perception of time has changed over the years. The analysis offered by the book examines how changes in the economy and society have affected the value of time.
Chancellor does a great job of showing how time affects various aspects of our lives, and how understanding the value of time can lead us to make wiser decisions about our finance, work, and personal lives. The book offers a comprehensive view of time as a valuable resource that we should be mindful of, manage, and use effectively.
"The Price of Time" presents an excellent and engaging exploration of the importance of time management and its impact on our lives. It is highly recommended for anyone interested in finance, economics, psychology, and self-improvement.
The book is divided into several sections that explain different dimensions of time and its value. Chancellor has provided extensive research that is presented in an easy-to-understand way, making the book accessible for readers of all backgrounds. He provides examples of famous personalities throughout history who have recognized the value of time and how they managed it to achieve great things.
One of the great things about this book is that it encourages readers to reflect on their use of time and how it can impact their lives in significant ways. It has great insights into human behavior and how our perception of time has changed over the years. The analysis offered by the book examines how changes in the economy and society have affected the value of time.
Chancellor does a great job of showing how time affects various aspects of our lives, and how understanding the value of time can lead us to make wiser decisions about our finance, work, and personal lives. The book offers a comprehensive view of time as a valuable resource that we should be mindful of, manage, and use effectively.
"The Price of Time" presents an excellent and engaging exploration of the importance of time management and its impact on our lives. It is highly recommended for anyone interested in finance, economics, psychology, and self-improvement.
October 26, 2023
«If the emergence of interest to incentivize lending is the most significant of all innovations in the history of finance, then the advent of negative interest might be considered the second most significant, possibly the stupidest, and certainly the strangest innovation in the history of finance.»
Mye nærmere en firer enn en toer. Jeg må nok tilbake til denne om ti års tid når jeg kan mye mer om dette, for denne ble tung. Ikke tungt skrevet som sådan, men tettpakket, og den forventer et visst kunnskapsnivå av leseren som jeg stort sett ikke kunne stille med.
Som en historiebok om konseptet renter taper den glatt mot «Debt: the first 5,000 years» som jeg helhjertet anbefaler, men The Price of Time går lengre i å mene mye om sentralbankenes gjøren og laden etter finanskrisen, og omsider også under koronaen, noe jeg satte veldig pris på.
Og konseptet om at renter ikke bare er prisen på penger, men strengt tatt prisen på tid, vil jeg ta med meg videre i livet.
Mye nærmere en firer enn en toer. Jeg må nok tilbake til denne om ti års tid når jeg kan mye mer om dette, for denne ble tung. Ikke tungt skrevet som sådan, men tettpakket, og den forventer et visst kunnskapsnivå av leseren som jeg stort sett ikke kunne stille med.
Som en historiebok om konseptet renter taper den glatt mot «Debt: the first 5,000 years» som jeg helhjertet anbefaler, men The Price of Time går lengre i å mene mye om sentralbankenes gjøren og laden etter finanskrisen, og omsider også under koronaen, noe jeg satte veldig pris på.
Og konseptet om at renter ikke bare er prisen på penger, men strengt tatt prisen på tid, vil jeg ta med meg videre i livet.
August 29, 2023
3.5 stars. In many places, piercingly insightful (particularly on China, and in unraveling the thinking behind the various experiments monetary policymakers have embarked on). Deductions for the middle portion of ~150pgs focused on all the different ways post 2008 crisis-response policies have distorted every aspect of economics and life. While these arguments largely made sense, this part felt especially repetitive and was a slog to get through for my unenlightened and unappreciative mind. Regardless, a good and worthwhile read.
February 19, 2023
Excellent book. Popularising the idea of interest as the price of time, but then tying it to the emergence of bubbles is done quite well. Especially useful given the quite wide range of sources and ideological breadth within them.
The idea behind low rates causing lower rates still is well explained, though there could have been more direct reference made to the global refinancing mechanism.
The chapter on China is weaker than the rest, though it goes into some rarely spoken points in some detail. The explanations within it don't necessarily fit with the conclusion of a sharp devaluation and ensuing inflationary crisis as predicted.
The idea behind low rates causing lower rates still is well explained, though there could have been more direct reference made to the global refinancing mechanism.
The chapter on China is weaker than the rest, though it goes into some rarely spoken points in some detail. The explanations within it don't necessarily fit with the conclusion of a sharp devaluation and ensuing inflationary crisis as predicted.
August 8, 2023
Interesting book, but it basically repeated its main point (artificially low interest rates cause problems) a thousand times in as many ways.
August 27, 2023
There are many customs which were widely followed in ancient societies but have turned morally abhorrent in modern ones. Slavery is one such thing. On the other hand, lending money at interest was repugnant to the ethics of ancient societies but has found acceptance in modern societies. What we have done is to bring in a demarcation between lending at exorbitant rates as usury and normal financial transactions at a fair rate of interest. In fact, interest is a justifiable reward for a mutual exchange of services. The lender provides the use of his capital for a period of time, and time has value. A trader borrowing money for commerce is morally bound to share a part of the profit he had earned from the use of capital provided by someone else. Even if the enterprise ended in a loss, it is of no fault of the lender and he has to be still compensated. This is in a nutshell the logic for continuing with the practice of charging interest for the use of others’ money. The word ‘interest’ derives from Latin ‘interesso’, which is a legal term for compensation paid by a defaulting debtor. As world economies grew to ever larger proportions, the rate of interest turned into a crucial parameter that has the potential to affect the health of the economy. Central banks were then instituted to continuously monitor the market movements and to tweak the interest rates to steer them in specified directions. Just as a high rate of interest is detrimental to the growth of the economy, too low an interest rate also have grave consequences attached to it which are explained in great detail in this book. ‘The pitfalls of a low interest rate’ should at least have been a subtitle of this book. Edward Chancellor is a graduate in history who had made his career in financial investment and asset allocation. In 2008, he received the George Polk Award for financial reporting and he is the author of ‘Devil Take the Hindmost: A History of Financial Speculation’ which was an NYT Notable Book of the Year.
The institution of taking a portion of money or commodities as fee for lending resources has an unbelievably early origin. The Mesopotamians charged interest on loans before they discovered how to put wheels on carts. The practice is much older than coined money which only originated in the eighth century BCE. Pre-historic people charged interest on loans of corn and livestock. However, popular ethics shunned interest. Religion followed suit and the church’s injunctions against usury and lending of interest were stringent. However, medieval bankers and merchants found countless ways to evade these – the original amount of loan may be overstated; loans in clipped coins had to be repaid in unclipped coins or loans stipulated for impossibly short periods and interest concealed in heavy penalties. Anyhow, with the growth of trade and commerce in the early-Renaissance period, the church’s attitude softened. The canonists then referred to borrowed money as borrowing something tangible such as a plough which has to be paid for. England put into effect a legislation in 1571 which made the taking of interest legal.
The author makes a prescient analysis of how early societies were ranged against taking interest and why modern societies take a much more tolerant attitude. Ancient cultures were agrarian in nature and villages were self-sufficient to a great extent. In such a system, a person approaches a lender for the sole purpose of financing something related to consumption such as on food or other family needs. The debtor was within the lender’s power to extract his money and tribal elders stepped in to prevent exorbitant rates of interest. This was thoroughly changed when trade and industry became widespread. The lender usually consisted of people who invested their savings in a bank and the debtor may be a business tycoon. The situation was reversed as the debtor became more prominent in stature than the creditor. In such a scenario, interest represented the lender’s stake in the success and profit of the borrower while usury was associated with the extortion of the needy. The rate of interest declined over time. This spawned extreme financial jugglery. Outbreaks of financial recklessness did not occur at random. They tended to appear at times when money was easy and interest low. The book explains the speculative bubbles in England and France in the seventeenth and eighteenth centuries as examples. Low interest rates fuel speculative manias, drive savers to make risky investments, encourage bad lending and weaken the financial system. Almost three-fourths of the book is dedicated to warn readers about the dangers of a very low interest rate approaching zero which was seen in many developed countries recently.
Chancellor cites the tragic instances of the 1929 and 2008 crises to drive home his argument on the disasters which follow a very low rate of interest. There is no detailed analysis of the crises which the author assumes the readers are familiar with. In the lead up to 1929, bank credit in the US more than doubled. Growth in industry could not match the growth of credit. So the rates came down and it changed track to finance stock loans, real estate mortgages and the purchase of foreign securities. Such a hefty arrival of cash lifted the share market to stratospheric levels from which there was only one way to go – towards the bottom. The shares tumbled very quickly and the Great Depression came into being. In a similar vein, in the years before 2008, ultra-low interest rates led to a housing bubble and the subsequent sub-prime mortgage crisis. However, the Federal Reserve kept the interest rates at rock bottom levels claiming that the meltdown was not a failure of economic science but of economic management in the form of regulations. The author fumes that instead of hounding them out of office, the Fed’s stand was credited with saving the world from another Great Depression.
The mechanism of how low interest rates vitiate national economic decisions is examined in detail. Central banks are tasked with ensuring price stability for which they target inflation to be within limits. When economy is healthy, inflation and interest rates will be lower. However, allocation targets of credit may change subtly and this may lead to bubbles. Lower interest rates lead to credit growth and larger accumulated debt on the economy. When the crash eventually comes, central banks intervene and usually lower the interest rates further. This starts a vicious cycle. However, this assertion is doubtful as mad speculation during the point of recovery from a crash does not seem plausible. Interest rate thus regulates the economy and weeds out inefficient entrepreneurs. At zero interest rate, heavily loss-making companies can still be in business on life support from bailout packages. The entire economy then progresses at the solemn pace of a funeral march. Over-investment in fancy profit schemes of unicorns is another feature of low interest rates. Monetary authorities often hope that companies would use their access to cheap debt to boost investment. Instead, they choose to buy back their shares with such leverage. Buying back own shares was illegal till 1982 as a form of stock manipulation, but was legalized to allow a company to employ easy credit. The financial sector hugely benefits from such an atmosphere at the detriment of core industrial output. Here, the author points out a major difference from the post-World War II era. Then also, the interest was kept low, but economy had had real growth because after 1945, Americans had robust savings, few debts, no financial bubbles and little financial engineering.
The book warns us about not getting too euphoric about the rate of recovery from a crash or during low interest rates and cautions against attributing them to the central banks’ policy of further cut in rates. When the cost of borrowing is low enough, even the most absurd investments can appear viable. The local government in the city of Shiyan in China ordered that local mountains be flattened to make space for new manufacturing plants nearby. This was at a time when China was going through low rates. Savings are needed for the accumulation of capital. Societies that don’t invest enough witness financial experts make money through debt manipulations which will tend to stagnation in the economy. A good deal of economic and jobs growth post-2008 crisis is false growth with little chance of sustainability. It is based on fake money conjured up by Fed to buy assets at fake prices.
The book talks about the clout exerted by the so called financial wizards which is disproportionate to the accuracy of their predictions. Chancellor narrates several instances when the opinions of even the greatest of experts – including John Maynard Keynes – going miserably awry. At any given time, it looks as if half of the experts will be predicting good times and the other half forecasting doom. So when a crash finally happens, half would claim victory and the other half would simply look the other way. The book concentrates only on the US and EU and a little bit on China. Most of the matter is relatable only to the US which severely restricts its appeal. As a developing economy which is soon poised to be No. 3 in the world, the author should have spared at least a few pages for India too. Rather than describing the custom of interest, the book attempts to showcase the ill effects of having a very low interest rate in the economy. As it is a book on interest, readers would expect a chapter on Islamic banking which is said to be conducting business in other ways as that religion still forbids taking or giving interest. Here also, the readers would get disappointed. The book is somewhat big for the content and readers would get a bit tired towards the end.
The book is recommended.
The institution of taking a portion of money or commodities as fee for lending resources has an unbelievably early origin. The Mesopotamians charged interest on loans before they discovered how to put wheels on carts. The practice is much older than coined money which only originated in the eighth century BCE. Pre-historic people charged interest on loans of corn and livestock. However, popular ethics shunned interest. Religion followed suit and the church’s injunctions against usury and lending of interest were stringent. However, medieval bankers and merchants found countless ways to evade these – the original amount of loan may be overstated; loans in clipped coins had to be repaid in unclipped coins or loans stipulated for impossibly short periods and interest concealed in heavy penalties. Anyhow, with the growth of trade and commerce in the early-Renaissance period, the church’s attitude softened. The canonists then referred to borrowed money as borrowing something tangible such as a plough which has to be paid for. England put into effect a legislation in 1571 which made the taking of interest legal.
The author makes a prescient analysis of how early societies were ranged against taking interest and why modern societies take a much more tolerant attitude. Ancient cultures were agrarian in nature and villages were self-sufficient to a great extent. In such a system, a person approaches a lender for the sole purpose of financing something related to consumption such as on food or other family needs. The debtor was within the lender’s power to extract his money and tribal elders stepped in to prevent exorbitant rates of interest. This was thoroughly changed when trade and industry became widespread. The lender usually consisted of people who invested their savings in a bank and the debtor may be a business tycoon. The situation was reversed as the debtor became more prominent in stature than the creditor. In such a scenario, interest represented the lender’s stake in the success and profit of the borrower while usury was associated with the extortion of the needy. The rate of interest declined over time. This spawned extreme financial jugglery. Outbreaks of financial recklessness did not occur at random. They tended to appear at times when money was easy and interest low. The book explains the speculative bubbles in England and France in the seventeenth and eighteenth centuries as examples. Low interest rates fuel speculative manias, drive savers to make risky investments, encourage bad lending and weaken the financial system. Almost three-fourths of the book is dedicated to warn readers about the dangers of a very low interest rate approaching zero which was seen in many developed countries recently.
Chancellor cites the tragic instances of the 1929 and 2008 crises to drive home his argument on the disasters which follow a very low rate of interest. There is no detailed analysis of the crises which the author assumes the readers are familiar with. In the lead up to 1929, bank credit in the US more than doubled. Growth in industry could not match the growth of credit. So the rates came down and it changed track to finance stock loans, real estate mortgages and the purchase of foreign securities. Such a hefty arrival of cash lifted the share market to stratospheric levels from which there was only one way to go – towards the bottom. The shares tumbled very quickly and the Great Depression came into being. In a similar vein, in the years before 2008, ultra-low interest rates led to a housing bubble and the subsequent sub-prime mortgage crisis. However, the Federal Reserve kept the interest rates at rock bottom levels claiming that the meltdown was not a failure of economic science but of economic management in the form of regulations. The author fumes that instead of hounding them out of office, the Fed’s stand was credited with saving the world from another Great Depression.
The mechanism of how low interest rates vitiate national economic decisions is examined in detail. Central banks are tasked with ensuring price stability for which they target inflation to be within limits. When economy is healthy, inflation and interest rates will be lower. However, allocation targets of credit may change subtly and this may lead to bubbles. Lower interest rates lead to credit growth and larger accumulated debt on the economy. When the crash eventually comes, central banks intervene and usually lower the interest rates further. This starts a vicious cycle. However, this assertion is doubtful as mad speculation during the point of recovery from a crash does not seem plausible. Interest rate thus regulates the economy and weeds out inefficient entrepreneurs. At zero interest rate, heavily loss-making companies can still be in business on life support from bailout packages. The entire economy then progresses at the solemn pace of a funeral march. Over-investment in fancy profit schemes of unicorns is another feature of low interest rates. Monetary authorities often hope that companies would use their access to cheap debt to boost investment. Instead, they choose to buy back their shares with such leverage. Buying back own shares was illegal till 1982 as a form of stock manipulation, but was legalized to allow a company to employ easy credit. The financial sector hugely benefits from such an atmosphere at the detriment of core industrial output. Here, the author points out a major difference from the post-World War II era. Then also, the interest was kept low, but economy had had real growth because after 1945, Americans had robust savings, few debts, no financial bubbles and little financial engineering.
The book warns us about not getting too euphoric about the rate of recovery from a crash or during low interest rates and cautions against attributing them to the central banks’ policy of further cut in rates. When the cost of borrowing is low enough, even the most absurd investments can appear viable. The local government in the city of Shiyan in China ordered that local mountains be flattened to make space for new manufacturing plants nearby. This was at a time when China was going through low rates. Savings are needed for the accumulation of capital. Societies that don’t invest enough witness financial experts make money through debt manipulations which will tend to stagnation in the economy. A good deal of economic and jobs growth post-2008 crisis is false growth with little chance of sustainability. It is based on fake money conjured up by Fed to buy assets at fake prices.
The book talks about the clout exerted by the so called financial wizards which is disproportionate to the accuracy of their predictions. Chancellor narrates several instances when the opinions of even the greatest of experts – including John Maynard Keynes – going miserably awry. At any given time, it looks as if half of the experts will be predicting good times and the other half forecasting doom. So when a crash finally happens, half would claim victory and the other half would simply look the other way. The book concentrates only on the US and EU and a little bit on China. Most of the matter is relatable only to the US which severely restricts its appeal. As a developing economy which is soon poised to be No. 3 in the world, the author should have spared at least a few pages for India too. Rather than describing the custom of interest, the book attempts to showcase the ill effects of having a very low interest rate in the economy. As it is a book on interest, readers would expect a chapter on Islamic banking which is said to be conducting business in other ways as that religion still forbids taking or giving interest. Here also, the readers would get disappointed. The book is somewhat big for the content and readers would get a bit tired towards the end.
The book is recommended.
May 1, 2023
This book The Joker'd me. I'm The Joker now. Fully lulled me into a false sense of security with anecdotes about terms of barley loans in ancient Sumeria and then, surprise, the entire modern monetary landscape is basically just the gas fight scene from Zoolander.
My big takeaways: is interest necessary? Yes. What's the right rate of interest for a given transaction? The rate that properly reflects the risk of capital loss, or any number that has good vibes. What happens if the prevailing rate is too high? The poor get fucked. Too low? The poor get fucked. Is it fair to blame Bernanke for my eczema? No, but do it anyway.
@Laura please tell me if I should remain The Joker'd
My big takeaways: is interest necessary? Yes. What's the right rate of interest for a given transaction? The rate that properly reflects the risk of capital loss, or any number that has good vibes. What happens if the prevailing rate is too high? The poor get fucked. Too low? The poor get fucked. Is it fair to blame Bernanke for my eczema? No, but do it anyway.
@Laura please tell me if I should remain The Joker'd
July 12, 2023
This book is very worth reading and rereading to get a sweeping account of the history of interest rates manipulations across the world's key economies. I have, however, two issues with this book:
1) THE key question I had reading this book is: what are the consequences of keeping interest rates artificially low for extended periods of time? The author goes through many episodes of speculative frenzies but doesn't really explain what exactly happens to the affected economy afterwards and how they come out the bursting of bubbles. (e.g., What happened to the Dutch after the Tulip Mania, to France after John Law, to England after South Sea, to the US after canal mania, railroad mania?? How exactly did the US get out of the Depression?) Maybe I missed this - someone please point it out if I did. But I read the book twice and was a bit frustrated that I couldn't find clear descriptions of the aftermaths of bubbles bursting.
2) The last third of the book is a bit confusing - the author sort of takes a sharp turn out of the blue and starts talking about all the problems with China. That just felt like too big of a topic to examine adequately when the more interesting topic in my opinion would be again what might happen after the bubble bursts? Anyways the author then concludes with a headscratcher that centralized digital currencies might be the answer...
The other minor issue I had was with some of (what I felt were) the forced analogies. "Interest" in 3000 BC Mesopotamia by way of returning more seeds than you borrowed or returning the calves of the heifer you borrowed seems very different from a central bank setting rates in a fiat currency system. I felt like clearer delineation on which episodes were under a barter system vs specie vs hybrid vs fiat would be very useful.
Overall still a very strong and useful book in my opinion and I would give it 5 stars if not for the above points.
1) THE key question I had reading this book is: what are the consequences of keeping interest rates artificially low for extended periods of time? The author goes through many episodes of speculative frenzies but doesn't really explain what exactly happens to the affected economy afterwards and how they come out the bursting of bubbles. (e.g., What happened to the Dutch after the Tulip Mania, to France after John Law, to England after South Sea, to the US after canal mania, railroad mania?? How exactly did the US get out of the Depression?) Maybe I missed this - someone please point it out if I did. But I read the book twice and was a bit frustrated that I couldn't find clear descriptions of the aftermaths of bubbles bursting.
2) The last third of the book is a bit confusing - the author sort of takes a sharp turn out of the blue and starts talking about all the problems with China. That just felt like too big of a topic to examine adequately when the more interesting topic in my opinion would be again what might happen after the bubble bursts? Anyways the author then concludes with a headscratcher that centralized digital currencies might be the answer...
The other minor issue I had was with some of (what I felt were) the forced analogies. "Interest" in 3000 BC Mesopotamia by way of returning more seeds than you borrowed or returning the calves of the heifer you borrowed seems very different from a central bank setting rates in a fiat currency system. I felt like clearer delineation on which episodes were under a barter system vs specie vs hybrid vs fiat would be very useful.
Overall still a very strong and useful book in my opinion and I would give it 5 stars if not for the above points.
July 21, 2023
An excellent, up-to-date review of the history of interest rates as drivers of markets and economies.
September 4, 2023
I The Price of Time ägnar Chancellor den första halvan av boken åt att etablera en historisk och idéhistorisk kontext mot vilken de senaste 15 årens extraordinära penningpolitiska experiment - som berörs i bokens samtidshistoriska andra del - kan utspelas i relation till. En spänstig text som går förvånansvärt fort att ta sig igenom. Chancellor har inte mycket snällt att säga om teknokraterna som dirigerar västvärldens centralbanker och som belönas med mer makt och inflytande ju mer fel de har. Bokens hjältar är figurerar som Friedrich von Hayek, Hyman Minsky, Mervyn King, William White och Claudio Borio. Insiders och outsiders som ifrågasätter rådande planeringsbyråkratiska dogmer och som oroar sig över den kontinuerliga ackumulationen och koncentrationen av risk.
***
As the Englishman Nicholas Barbon wrote in the late seventeenth century: ‘Interest is the Rent of Stock [i.e. capital], and is the same as the Rent of Land: The first, is the Rent of the Wrought or Artificial Stock; the Latter, of the Unwrought, or Natural Stock.’ The Scottish notation for interest in Barbon’s day was ‘@rents’. In the following century, the French economist and statesman Anne-Robert Jacques Turgot elaborated on Barbon’s insight: ‘Every capital in the form of money … is the equivalent of a piece of land producing a revenue equal to a particular fraction of this sum.’ For Turgot, the world of finance was a mirror held up to the world, with real and financial assets exchangeable for each other. Since land, buildings and factories produce income, so money must yield interest. This important insight is too often overlooked by modern economists.
To twenty-first-century policymakers, the interest rate is simply a lever used to control inflation and tweak economic output. Yet an acquaintance with the Babylonian origins of interest should give pause for thought. Interest has always been with us because resources have always been scarce and must be rationed somehow, because wealth is unequally distributed between creditors and borrowers, and because, as Böhm-Bawerk says, ‘interest is the soul of credit.’ Interest exists because loans are productive, and even when not productive still have value. It exists because those in possession of capital need to be induced to lend, and because lending is a risky business. It exists because production takes place over time and human beings are naturally impatient.
Earlier generations of economists, who considered the problem of interest more deeply than their twenty-first-century counterparts, had no doubt as to its importance. For Böhm-Bawerk, interest was ‘an organic necessity’. Irving Fisher called interest ‘too omnipresent a phenomenon to be eradicated’. In similar vein, Joseph Schumpeter stated that interest ‘permeates, as it were, the whole economic system’. The author of Das Kapital, an avowed enemy of interest, agreed with this arch-apologist for capitalism. In a phrase evocative of the ancient world in which a charge for lending was first recorded, Marx writes that ‘usury lives in the pores of production, as it were, just as the gods of Epicurus lived in the space between worlds.’
***
The spirit of capitalism was transmitted across networks of credit that connected lenders and borrowers through bonds of mutual self-interest. Daniel Defoe described credit as a ‘stock’, synonymous with capital, while the French in Defoe’s day referred to capital as ‘interest’, in the sense of taking a stake. fn6 From a technical viewpoint, capital consists of a stream of future income discounted to its present value. Without interest, there can be no capital. Without capital, no capitalism. Turgot, a contemporary of Adam Smith’s, understood this very well: ‘the capitalist lender of money,’ he wrote, ‘ought to be considered as a dealer in a commodity which is absolutely necessary for the production of wealth, and which cannot be at too low a price.’ (Turgot exaggerated. As we shall see, interest at ‘too low a price’ is the source of many evils.)
Thomas Wilson’s claim that ‘tyme is precious’ was famously appropriated by Franklin in his Advice to a Young Tradesman as a spur to capitalist endeavours. At last, the blood-sucking usurer had prevailed against his legions of critics. According to the French historian Jacques Le Goff, ‘One economic system replaces another, only after it has passed through a long and varied obstacle course. History is people, and the instigators of capitalism were usurers: merchants of the future, sellers of time.’
***
The Bagehot rule is much cited by monetary policymakers in the twentyfirst century. . . . Yet Bagehot’s stringent conditions were not followed. Modern lenders of last resort have only a tenuous connection with their Victorian antecedents. They do not lend at high interest but at the lowest rates. Their emergency loans are not provided for a short period, but for years on end. They do not lend against high-quality collateral but reach to the outer edges of the credit spectrum. Modern central bankers show far less concern for moral hazard than Bagehot – and their actions would give Thomson Hankey an acute case of neuralgia.
***
We have seen how the Fed’s pursuit of price stabilization in the 1920s contributed to that era’s credit boom and speculative excesses. Fixing a specific target to the same policy only exacerbates matters. It has long been recognized that managing institutions by reference to a fixed quantitative indicator has its limitations. Quantitative targets tend to get chosen because they are easy to quantify. But factors that aren’t easily measured tend to get overlooked. As a result, the use of targets is associated with a variety of adverse outcomes, including short-termism, the diversion of resources into bureaucracy, risk aversion, unjustified rewards, and the undermining of institutional culture. . . .
The mistake in setting targets lies in assuming that relationships between variables – in this case a certain measure of the money supply and inflation – are stationary. In the real world, human behaviour responds to attempts at control. ‘The essence of Goodhart’s Law,’ write John Kay and Mervyn King in their book Radical Uncertainty, is that ‘any business or government policy which assumed stationarity of social and economic relationships was likely to fail because its implementation would alter the behaviour of those affected and therefore destroy that stationarity.’ As a former Governor of the Bank of England, Lord King’s prime responsibility had been to implement the 2 per cent inflation target. After retirement in 2013, he openly questioned the limitations of this rule: ‘we have not targeted those things which we ought to have targeted and we have targeted those things which we ought not to have targeted, and there is no health in the economy.’
***
The Federal Reserve’s reflexive tendency to ease monetary conditions whenever markets became turbulent encouraged yet more risk-taking. Borio observed that central bankers were slow to hike rates during booms but rushed to ease them after every bust. Their asymmetrical approach imparted a downward bias to interest rates and an upward bias to debt, he noted. The danger arising from the Fed’s inconsistency was a longstanding concern: ‘lowering rates or providing ample liquidity when problems materialise but not raising rates as imbalances build up, can be rather insidious in the longer run. They promote a form of moral hazard that can sow the seeds of instability and of costly fluctuations in the real economy.’ Borio and his colleague Philip Lowe made this comment in 2002, as the Fed was slashing rates in the aftermath of the Dotcom bust. Half a decade later, their prophetic words were borne out.
***
A few months after Lehman’s bankruptcy, Borio was warning about the dangers of keeping extreme monetary policies in place for too long. Over the following years, he stood apart from other monetary economists in alerting the world to the unintended consequences of the zero interest rate policy (ZIRP), the negative interest rate policy (NIRP) and other monetary innovations. ‘The highly abnormal is becoming uncomfortably normal,’ Borio bemoaned after the October 2014 bond market ‘flash crash’. As one year followed another, unconventional monetary policies became more unconventional. Abnormality became the new normal.
Monetary policy is path dependent, said Borio. Once the central bankers have taken a wrong turning, the financial system and economy are driven off course: economic growth falters, financial imbalances accumulate, and capital is misallocated. Bubbles form. Too much debt accumulates. After the crisis, central bankers tried out new monetary measures – quantitative easing, paying banks interest on their reserves, zero and negative interest rates, and various other innovations. They stamped on the gas pedal whenever the economy lost momentum, or when the financial engine threatened to stall. The interest rate was floored but still the economic juggernaut continued to slow. All the signs pointed in the direction of ever lower rates. How to get back on track, Borio was asked. ‘If I were you,’ he replied, ‘I would not start from here.’ It’s an old joke.
***
Establishment economists considered with disdain the flood of papers churned out by Borio’s BIS team. The BIS ‘is listened to but ignored’, the chief economist at a rival international monetary authority is said to have sniped. Borio can’t be modelled, sneered critics in the academy. Similar comments were once directed at the maverick economist Hyman Minsky, whose brilliant insights into financial instability were belatedly recognized after the subprime crisis.
***
On Ruskin’s gravestone are engraved the words, ‘there is no wealth but life’. In the twentieth century, Ruskin’s conception of wealth was taken up by another self-taught economist, Frederick Soddy. A chemist by training who had received a Nobel prize for work on radioactive isotopes, Soddy held that life is a struggle for energy and that capital was really a form of stored energy: ‘All wealth is the product of work, in the physical sense of the expenditure of available energy,’ he wrote. Soddy thought it absurd to measure wealth by exchange value since speculators could push up the price of commodities ‘without any addition to the national wealth’. Soddy concluded that ‘the “wealth” of millionaires turns out on examination to be virtual … and to consist mostly of claims to wealth.’ Adam Smith would have agreed. ‘Real wealth,’ wrote Smith, derives from ‘the annual produce of the land and labour of the society’. By this light, much millennial wealth wasn’t real at all, but mere claims to wealth whose market value multiplied as the discount rate declined.
***
As in The Truman Show, we have come to live in a controlled environment, with its fake money, fake interest rates, fake economy, fake jobs and fake politicians. Our bubble world is sustained by a combination of passive acquiescence and powerful vested interests. It’s a 24/7 show with a global audience. Since risk is controlled, we have nothing to fear. Any departure from the bubble threatens a crisis. Extreme measures are adopted: negative interest rates, limitless amounts of quantitative easing and, in response to British’s voters’ wishes to leave the European Union, even a ‘Project Fear’. Too much is at stake to let the bubble burst.
***
If too many investors tried to cash out simultaneously from their illiquid investments they would discover the harsh truth of Keynes’s comment that ‘there is no such thing as liquidity of investment for the community as a whole.’ . . . In the summer of 2018, the manager of a bond fund operated by Global Asset Management, a reputable Swiss investment firm, was sacked after it was revealed that he had invested clients’ funds in opaque and illiquid assets. The following year, liquidity problems struck a European asset management company with the singularly inappropriate name H2O. The firm’s investors had been promised daily redemptions, but their money was tied up in hard-to-trade assets valued with ‘unobservable inputs’. This case of ‘illiquid love’, said the Financial Times, signalled ‘the potential pitfalls of the frenetic search for higher returns in an era of record-low interest rates’.
***
The upshot of the global financial crisis was indeed a great deal more regulation. The rules of the 2010 Dodd–Frank Act ran to tens of thousands of pages. As the Bank of England chief economist Andrew Haldane commented: ‘Dodd–Frank makes Glass–Steagall [the landmark Depressionera regulatory Act, totalling just 37 pages] look like throat-clearing,’ while Europe’s planned new regulations were reckoned to be twice as long as Dodd–Frank’s. 55 International banking rules, set by the Basel Committee, also increased exponentially, from Basel I (1988) at 30 pages to Basel III (2011) at 616 pages. ‘[C]entral banks are printing rules almost as fast as they’re printing money,’ quipped James Grant.
More regulations meant more regulators. Once upon a time, the City of London had been ruled by a raised eyebrow from the Governor of the Bank of England. Even in the late 1970s, the Old Lady of Threadneedle Street employed fewer than eighty regulators – one for every 11,000 City workers. After the 2008 crisis, the ratio of UK financial regulators to finance employees fell to 1:300. A similar proliferation of regulatory box-tickers occurred in the United States. Large US banks hired thousands of compliance officers at a cost of tens of billions of dollars to keep up with the growing thicket of financial red tape.
It was never likely that the post-crisis regulations would achieve their intended aim of protecting the financial system from mishaps. Clever financiers can always find loopholes in the rules. As we saw in Chapter 1, regulatory arbitrage has been around since Babylonian times. No matter how extensive the regulations nor how many regulators are employed, the authorities can never gather enough information to foresee and control every evasive manoeuvre. This is the central problem with central planning. The regime of ultra-low interest rates made their task even more intractable. As Claudio Borio pointed out, monetary policy and what was now grandly termed ‘macroprudential’ regulation pulled in opposite directions. When the price of leverage declines, the amount of borrowing increases and Wall Street has a stronger incentive than normal to evade regulations in search of an extra buck.
Thus, ultra-low interest rates and other monetary novelties after 2008 induced an increase in leverage, a debt-fuelled merger boom and countless carry trades (most of which involved ‘volatility-selling’ in some form or other). The search for yield brought about a collapse in underwriting standards and the return of less-regulated ‘shadow banks’. Regulatory arbitrage abounded. In Switzerland, where new regulations restricted the size of bank mortgages, construction companies stepped in to provide home loans. In 2017, the UK’s chief financial regulator identified several cases of what he called ‘pure regulatory arbitrage’ by British banks, but neglected to mention that the Bank of England’s monetary policy provided a strong incentive to evade the rules.
Andrew Haldane identified another problem. Perhaps financial regulation didn’t reduce systemic risk, he suggested, but merely influenced where risk appeared. Haldane pointed to the fact that savings had left an increasingly regulated banking system for credit markets. ‘Risk, like energy, tends to be conserved not dissipated, to change its composition but not its quantum,’ said Haldane. ‘So it is possible the financial system may exhibit a new strain of systemic risk … now originating on the balance sheets of mutual funds.’
The Bank of England’s top economist was on the right track but understated the problem. The quantum of risk doesn’t remain the same under all conditions. Ultra-low interest rates, as Bagehot understood and modern research confirms, encourage investors to take more risk. Ultra-low rates and central banks’ money-printing may have dampened market volatility, but, as Hyman Minsky pointed out – and the recent experience of the subprime crisis confirmed – financial stability is destabilizing. Moral hazard teaches us that when insurance premiums are set too low, people build houses on flood plains. Activist central banks, which intervened during every bout of market turbulence and set Abbé Galiani’s ‘price of insurance’ at nothing, had a similarly deleterious influence on Wall Street’s behaviour.
There was a solution to the regulatory conundrum: higher interest rates and a less accommodating monetary policy. Unfortunately, Jeremy Stein’s clever comment about monetary policy ‘getting into all the cracks’ fell on deaf ears. Besides, when Stein made this comment in February 2013 matters were already out of hand. A ravenous hunger for yield had already unleashed a million carry trades. There was no turning back. Monetary policymakers were fearful that removing their extraordinary measures would induce financial turmoil. After the Fed slowly started hiking interest rates from late 2015 onwards, Volmageddon showed how the unwinding of an obscure carry trade could wreak havoc.
As Hyman Minsky observed, most financial innovation is intended to get around the regulations put in place after the last crisis. In this way, financial regulation resembles the Maginot Line, built by the French after the Great War to protect against another German invasion. During the Second World War, the German army simply bypassed this massive fortification by going through the supposedly impenetrable forests of the Ardennes.
***
Capital was misallocated in China on a scale not seen since the heyday of the Soviet Union. Soviet central planners had also operated under conditions of financial repression. In his Political Economy of Socialism, Hungarian economist János Kornai explained how monetary conditions in Communist Russia and its satellites contributed to their economic failure: "[M]arket coordination had not become predominant in these economies. If the real interest rate is negative for a long period, it is unable to control the allocation of investments and gives false information to decision makers for all the decisions that compare present and future revenues and expenditures."
***
As William White comments (in a personal email to the author): central bankers make a profound epistemological error by failing to treat the economy as a complex adaptive system. All their other errors are derivative.
December 11, 2022
A very informative book on the importance of interest rates.
July 6, 2023
This one’s dense, but worthwhile. The first half is a history of interest, and the second half is a thorough and critical look at ultra low interest rates.
March 14, 2023
When the price of time is set at nothing, finance becomes absurd
Interest rate is so misunderstood. So much so the bunch of people who were among the firsts to master it and made it their vocation - namely, the Jews - get a bad reputation for greed, from their role depicted in the Bible as a usurer to the global finance conspiracies. But what is really an interest?
This book covers the 4000 years of evolution of interest. Using many intriguing examples from history, economics, politics, even religion, it tells the many trial and errors of using it, the debate over its function and its legal limit, the exploitations of it, the usage of it for a natural selection, the benefits of it, all of which serve as the foundations for the core thesis of the book: “when the price of time [aka interest rate] is set at nothing or turns negative, and central banks print money without limit, finance becomes absurd.”
It is written by Edward Chancellor, an award-winning financial writer whose role in the industry includes working at Lazard Brothers in the 1990s and serving as a senior member of the asset allocation team at GMO between 2008-2014. His book on financial speculations, “Devil Take the Hindmost”, remains in my top 10 favourite even today after nearly 2 decades since the last time I read it. And in a way, this book is similar with his first book, where Chancellor uses the familiar stories we found there but he illustrates them with a different (complementary) angle: the interest rates rather than the madness of the crowds, the trigger rather than the reaction.
The book argues that the crisis from 2008 is far from over, only delayed and prolonged, and that we’re in the prospect of having a colossal meltdown as an effect of the policies implemented since the downfall of Lehman Brothers: the cause and effects link between low interest rates and inflation, the problems arise in the easy credit environment, the “zombification” of corporations from Japan to Europe to the US, and the many spillover effects ever since, like the Arab Spring 2011, the collapse of Brazil in 2013, Greece in 2015, the crash of Turkish Lira and Argentinian Peso, the political chaos in Italy, the boom and bust of China, and indeed the global inflation since 2022.
And along the spectacular example stories, Chancellor inserts the intellectual debates behind the decision makings by those in charge, including the citations of original thinking from past legendary economists - from Bastiat and Smith, to Marx, from Keynes and Hayek, to Schumpeter - combined with the zeitgeist of each example’s era, which filled the book with a front row seat in witnessing the battle of ideas that have shaped today’s global financial environment.
For example, It is fascinating how eerily similar today’s global economic situation is with 1700s France. While the bailouts and interest rate cuts down to zero by the Fed in 2008 subsequently led to the inflated global asset prices and the battle against high inflation today, France began their economic woes after the wars since the death of Louis XIV left the country with mountains of debts.
Orchestrated by John Law - an outlaw in England that managed to escape to France and climb his way up to practically become a finance minister/financial manipulator - France then went into a similar pattern of pushing down interest rates and printing money by buying government debts, which was tied to the Mississippi Company that Law created. Long story short, it didn’t end well in 18th century France after it eventually triggered an inflation (23% at its height) alongside the inflated share price of the Mississippi Company, which then culminated in the crash of the Mississippi Bubble in 1720.
Moreover, from other examples such as the Roaring Twenties, Railway Mania 1840s, and Japan in the 1980s, Chancellor shows that when interest rates get too low investors usually become restless, looking for other investment vehicles that have a higher return, and that market unrest always follows a period of low interest. “Easy money fostered credit growth, and credit growth fostered speculative excesses”, argued Chancellor, a remark also echoed by legendary investor Warren Buffett when he said “interest rates basically are to the value of assets what gravity to matter”, once this gravitational force is removed (i.e. becoming zero interest rates) all sorts of speculative assets - from stocks, to bonds, property, commodities, to crypto currencies - were free to float into the stratosphere.
A 17th century economist Richard Cantillon provides even more accurate descriptions of the current global situation when he said back then “when a national bank turns on the printing press and buys up government debt, the newly created money is initially trapped within the financial system, where it inflates financial assets rather than consumer prices, and only slowly seeps out into the wider economy.” This thesis is evident in how covid relief measures (rate cuts and bond buying/money printing that doubles the Fed’s balance sheet from $4 trillion to $8 trillion) exacerbates the inflation firstly towards financial assets in 2020-2022 and then eventually spillover to the economy in a form of severe inflation, which, according to Chancellor, “the acceleration of these tendencies brought them closer to an endpoint”, a potential disaster that never ends well for any of the examples from history.
This is where we are at the moment, on the verge of another catastrophe. As I write this review Signature Bank shuts down, First Republic Bank’s share price is collapsing, UniCredit’s shares halted, and Credit Suisse’s CDS hits record high, while the stock price of other US regional bank are enduring a sell-offs, after the US government just bailed out Silicon Valley Bank the previous day (the second largest bank failure in US history after Washington Mutual Bank in 2008), as a ripple effect of the change of environment from decade-long zero rate to the aggressive rate hike by the Fed.
This makes this book very timely, a strong warning of what may come in the near future. And as you can see we’ve been warned, even by long-dead economists centuries ago. But we just never listen.
Interest rate is so misunderstood. So much so the bunch of people who were among the firsts to master it and made it their vocation - namely, the Jews - get a bad reputation for greed, from their role depicted in the Bible as a usurer to the global finance conspiracies. But what is really an interest?
This book covers the 4000 years of evolution of interest. Using many intriguing examples from history, economics, politics, even religion, it tells the many trial and errors of using it, the debate over its function and its legal limit, the exploitations of it, the usage of it for a natural selection, the benefits of it, all of which serve as the foundations for the core thesis of the book: “when the price of time [aka interest rate] is set at nothing or turns negative, and central banks print money without limit, finance becomes absurd.”
It is written by Edward Chancellor, an award-winning financial writer whose role in the industry includes working at Lazard Brothers in the 1990s and serving as a senior member of the asset allocation team at GMO between 2008-2014. His book on financial speculations, “Devil Take the Hindmost”, remains in my top 10 favourite even today after nearly 2 decades since the last time I read it. And in a way, this book is similar with his first book, where Chancellor uses the familiar stories we found there but he illustrates them with a different (complementary) angle: the interest rates rather than the madness of the crowds, the trigger rather than the reaction.
The book argues that the crisis from 2008 is far from over, only delayed and prolonged, and that we’re in the prospect of having a colossal meltdown as an effect of the policies implemented since the downfall of Lehman Brothers: the cause and effects link between low interest rates and inflation, the problems arise in the easy credit environment, the “zombification” of corporations from Japan to Europe to the US, and the many spillover effects ever since, like the Arab Spring 2011, the collapse of Brazil in 2013, Greece in 2015, the crash of Turkish Lira and Argentinian Peso, the political chaos in Italy, the boom and bust of China, and indeed the global inflation since 2022.
And along the spectacular example stories, Chancellor inserts the intellectual debates behind the decision makings by those in charge, including the citations of original thinking from past legendary economists - from Bastiat and Smith, to Marx, from Keynes and Hayek, to Schumpeter - combined with the zeitgeist of each example’s era, which filled the book with a front row seat in witnessing the battle of ideas that have shaped today’s global financial environment.
For example, It is fascinating how eerily similar today’s global economic situation is with 1700s France. While the bailouts and interest rate cuts down to zero by the Fed in 2008 subsequently led to the inflated global asset prices and the battle against high inflation today, France began their economic woes after the wars since the death of Louis XIV left the country with mountains of debts.
Orchestrated by John Law - an outlaw in England that managed to escape to France and climb his way up to practically become a finance minister/financial manipulator - France then went into a similar pattern of pushing down interest rates and printing money by buying government debts, which was tied to the Mississippi Company that Law created. Long story short, it didn’t end well in 18th century France after it eventually triggered an inflation (23% at its height) alongside the inflated share price of the Mississippi Company, which then culminated in the crash of the Mississippi Bubble in 1720.
Moreover, from other examples such as the Roaring Twenties, Railway Mania 1840s, and Japan in the 1980s, Chancellor shows that when interest rates get too low investors usually become restless, looking for other investment vehicles that have a higher return, and that market unrest always follows a period of low interest. “Easy money fostered credit growth, and credit growth fostered speculative excesses”, argued Chancellor, a remark also echoed by legendary investor Warren Buffett when he said “interest rates basically are to the value of assets what gravity to matter”, once this gravitational force is removed (i.e. becoming zero interest rates) all sorts of speculative assets - from stocks, to bonds, property, commodities, to crypto currencies - were free to float into the stratosphere.
A 17th century economist Richard Cantillon provides even more accurate descriptions of the current global situation when he said back then “when a national bank turns on the printing press and buys up government debt, the newly created money is initially trapped within the financial system, where it inflates financial assets rather than consumer prices, and only slowly seeps out into the wider economy.” This thesis is evident in how covid relief measures (rate cuts and bond buying/money printing that doubles the Fed’s balance sheet from $4 trillion to $8 trillion) exacerbates the inflation firstly towards financial assets in 2020-2022 and then eventually spillover to the economy in a form of severe inflation, which, according to Chancellor, “the acceleration of these tendencies brought them closer to an endpoint”, a potential disaster that never ends well for any of the examples from history.
This is where we are at the moment, on the verge of another catastrophe. As I write this review Signature Bank shuts down, First Republic Bank’s share price is collapsing, UniCredit’s shares halted, and Credit Suisse’s CDS hits record high, while the stock price of other US regional bank are enduring a sell-offs, after the US government just bailed out Silicon Valley Bank the previous day (the second largest bank failure in US history after Washington Mutual Bank in 2008), as a ripple effect of the change of environment from decade-long zero rate to the aggressive rate hike by the Fed.
This makes this book very timely, a strong warning of what may come in the near future. And as you can see we’ve been warned, even by long-dead economists centuries ago. But we just never listen.
November 8, 2023
This is one of the best books on economics I have ever read. It is supremely well-researched and cited, and takes to issue the most important price to be determined in any polity: the interest rate, or more aptly, ‘The Price of Time’. While its history of how thinkers have generally conceptualized interest from antiquity to modernity is fascinating, its contextualization of the ‘easy money’ approach contemporary policymakers have embarked on for the past 2 decades is downright frightening. When contrasted in its naked form against history, there really is nothing innovative about QE or MMT - its just money printing! When the most important price is arbitrarily determined, the authour contends, massive capital misallocations occur, bubbles become rampant and social consequences are devastating. In short, the book is one more arrow in the quiver to any Austrian argument and destroys the intellectual credibility and respectability of Modern Monetary Theory.
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