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The Price of Time Summary and Analysis“The Price of Time,” by Edward Chancellor, is almost two distinct books. The first third of the book is primarily a historical, even philosophical discussion of interest rates. How did our long-ago ancestors think about, rationalize, and sometimes demonize those who would wish to charge interest for lending them money? Why in most of history have we implicitly rationalized a charge for lending money, even on collateralized assets? What is the “right” natural rate of interest, and is there even a “right” natural rate of interest? Is charging interest even moral?The second part of the book is more a modern, methodical, and sometimes repetitive critique of the incessant focus of modern-day monetary policy on low interest rates and tying interest rates explicitly to inflation. Indeed, if you wanted to summarize the whole book in one sentence fragment it could be: “low interest rates bad.”There is a common throughline of the two sections of the book, as a decent chunk of the historical overview is dedicated to chronicling periods of abnormally low interest rates, and how history tends to at least rhyme if not exactly repeat with subsequent outcomes. The book does make several convincing and salient points that might fly in the face of “consensus,” and certainly would be refuted by the Federal Reserve. For instance:1) Modern central bank policy makers have radically misinterpreted the lessons of major historical events from Josiah Child’s East India Company to John Law’s Mississippi Company to the Bagehot Law around financial crises, all the way through the Great Depression.2) Tying inflation to monetary policy while also insisting on managing to 2% CPI is asinine. Indeed, there is nothing wrong with deflation as long as it’s the “good deflation” (productivity gains from technology) vs “bad deflation” (lack of demand), yet the Fed conflates the two.3) Focusing on price stability ignores the true drivers of the boom/bust cycle (specifically credit growth and pockets of asset price inflation) because of the misinterpretation of #2 above.4) Holding rates low for extended period exacerbates income inequality and consistently makes the rich richer and the poor poorer.5) “Negative Rates” or even low rates distort the concept of capital and make it impossible to value assets.6) Low rates beget more low rates due to many unintended consequences.The book does a great job in my view of tying modern day thinking back to their historical derivations and astutely points out where modern-day thinkers may even be misinterpreting the thinking of previous economists. While a bit repetitive in parts, I overall found this book to be a great meditation on the philosophy around interest rates tied to modern practice.Must Read Chapters: Chapters 1,4, 5, 6, 14, Conclusion/PostscriptSubscribe nowChapter SummariesChapter 1 – Babylonian BirthChapter 1 takes us into the documented origins of interest as a concept. The book claims interest is older than the wheel, and that it existed well before coined money. Although there are various theories around the origination of interest, it does seem to be steeped in the concept of livestock. For instance, “capital” is from caput, which is a head of cattle. Rather than lend money, originally, one might lend seeds or livestock.Documentation of loans was also a bit different than today, as records of it were on clay tablets. These tablets had similar information as they might today, including “names of creditor and debtor, the loan amount, the date of the loan, and when repayment is due, and, in most cases, the amount of interest to be charge.” (page 5) In some cases collateral was noted, including at least one case the “wife of the borrower.”Interestingly, the book claims most of the records we have of these ancient debts are of unpaid debts, as the tablets were destroyed once the debt was paid off.In the period of the Mesopotamians (~4000 BC), the wonders (and dangers) of compound interest were documented. For instance, two cities went to war over accumulated compound interest that had no hopes of ever being repaid. Chancellor notes, perhaps unsurprisingly, that this period had the first documented cases of debt cancellation. This was not intuitive at the time, as previously debt would often transfer even beyond death to next of kin or even relatives.As it relates to the rate of debt, a major focus of the whole book, rates consistently moved down over time, but the first documented effective rates were in the 20-33% range (Babylonians, ~1700 BC, for silver and barley, respectively). These rates went effectively unchanged for centuries, implying something beyond growth or economic forces dictating them.“The Greeks, who introduced the decimal system, charged a standard interest of 10 per cent per annum. Under the Roman duodecimal system, interest was usually at…8.33 per cent per year.” (page 12)“In short, the ancient history of interest provides no strong support for any particular view as to how the rate of interest is formed. Law and custom obviously played an important role. Yet occasional changes in the quantity of money in circulation also appear to have influenced interest rates. Market forces were at play, to some extent at least.” (page 13)Chapter 2 – Selling TimeFor large parts of history, there was a debate about whether interest was even moral. For instance, an ancient Athenian text describes “bankers as a ‘pestilential tribe worse than malignant nurses, pedagogues, midwives, begging priests, and fishmongers’…of all these unclean trades, usury was deemed the lowest.” (page 18)In fact, unofficially, interest was forbidden by Church law during the medieval periods (~1200-1570). A common refrain was it was “better to steal from the rich than to slay the poor by usury.”A key principle that we take for granted today that was not then accepted was that time has value in of itself. It was unethical to ask for more than you’ve lent as money does “not reproduce itself”, as Thomas Aquinas wrote. (page 19)However, this interest prohibition was probably a bit like the US prohibition of alcohol movement. It may have been technically illegal in practice, but was still practiced widely, with merchants finding “countless ways to evade clerical injunctions” (page 23)And by the late 16th century it was becoming more formally accepted that time indeed does have value:“Wilson then goes on to provide a definition of interest: ‘Usurye is also said to be the price of tyme’…Interest has been described in many way over the years- it’s often referred to as the price of money. But Wilson knew better. Interest, he said, is the price of time. There is no better definition.” (page 27)Chapter 3 – The Lowering of InterestChapter 3 grapples with the ongoing evolution of the moralities of overly high and low interest rates, and whether there is indeed a “natural interest rate.”Once interest was “allowed”, there was still an ongoing moral tug that excessively higher interest rates were immoral (predatory lending is still a very real concept today, e.g. payday lending or excessive credit card rates). This led to an increasingly open mind towards managing interest rates lower and rationalizing these lower rates as good for everyone. It is with this chapter that the book begins planting the seeds of “low interest rates bad.”Chancellor seems to point to 17th century England as the first major instance of consciously using lower interest rates to stimulate economic growth. Josiah Child, future governor of the East India Company, laid out the virtues of low interest rates in “Brief Observations Concerning Trade and the Interest of Money (1668)”:“For the abatement of interest will certainly and necessarily increase Industry and good Husbandry; it will as certainly multiply Traders and Stock in Trade, and in consequence the gain of the present Merchant who employs his own Stock, and lends to others, will be the less.” (page 35)It is clear, though, that Child was a “most unlikely champion of the poor”, and in fact wanted lower interest rates to build his East India Company on the back of cheap credit. He used the guise of cheap credit for everyone to build his personal empire.It is interesting that even back in these times there was a recognition by some thinkers/economists that extended periods of low interest might not in fact be virtuous for all. John Locke for instance, fiercely advocated against low interest, claiming that wealth disparity would increase, and the benefits would accrue primarily to the richest, which would compound:‘Any reduction in interest will mightily increase the advantages of bankers and scriveners, and other such expert brokers…skilled in the arts of putting out money…it will be a gain to the borrowing merchant, for he borrows at 4 per cent, and his returns be twelve per cent, he will have eight per cent, and the lender four.’ (page 38)Locke further believed that excessively low rates would cause people who otherwise did not want to borrow to seek out borrowing and increase their own risk beyond comfortable levels.This chapter finally pontificates on the “natural rate of interest”. In other words, Locke and others began to formulate that there was some true interest rate independent of monetary factors and that monetary policy should not deviate from this natural rate of interest. Locke himself thought it was “above 4 per cent and probably closer to 6 per cent.” (page 41)Chapter 4 – ChimeraPerhaps the most fascinating chapter in the book in that it attempts to connect a gigantic bubble (The Mississippi Company) with modern day accepted monetary policy. In other words, despite the ultimate disaster that John Law’s Mississippi Company (1718-1720) became, the policies that came from it are still inexplicably championed and accepted to this day:“Law has been called the original monetarist- an eighteenth century forerunner to Milton Friedman. His monetary policy prescription for the basis for modern central banking. Yet Law’s System, as he called it, was a spectacular failure.” (page 46)Law’s “System” was essentially the first subversion of money needing to be backed by gold or other precious metals (or indeed anything at all). The Bank of England opened in 1694 and the “Bank’s first issue of paper notes was backed not by gold but by a claim on the public credit.” (p 47)Like Josiah Child of East India Company, John Law made similar proclamations about the virtues and benevolence of low rates driving productivity, in that the benefits would trickle down from top to bottom and ultimately benefit all because it would stimulate the economy and ultimately produce jobs for the people.John Law was the first real proponent of quantitative easing. Per Chancellor:“In modern language, Law was suggesting that a central bank could reduce interest rates by printing money; that this would alleviate the position of heavily indebted borrowers (in this case, French nobles), create jobs, and revive the economy. At the same time, the cost of servicing government debt would fall, and deflation come to an end.” (page 49)Once Law convinced people this was the right course, Law was able to engineer one of the largest, original stock bubbles in world history, through his Mississippi Company investment. Law had all of the characteristics of a classic stock charlatan: telling a great story, getting government subsidies, and creating a sense of FOMO that built frothing- at-the-mouth demand.The first “IPO” of the Mississippi Company was paid for effectively by Government printing presses, “the funny money of depreciated government debt.” (page 52) For subsequent funding rounds, it was highly advantageous to have owned shares from previous subscriptions to “get in” on the new issue. Further, it was pitched that one should “get in early” because each successive fund raise would be done at higher prices. As for hype, Chancellor describes it well:“The prospects of the Mississippi Company were hyped by Law’s agents in the press. Louisiana was described as a new El Dorado, abundant with gold and other precious metals. Le Nouveau Mercure reported that its fertile land was populated with marsupial rats the size of cats that supposedly tasted like suckling pig. Settlers en route for the colony…were equipped with shiny new tools and paraded through the streets of Paris.” (page 52)Chancellor goes on:“The main stimulus for the bubble came from the Royal Bank’s printing press. Over the course of 1719, the amount of paper money in circulation increased by an estimated billion livres…by May 1720, the total circulation of notes exceeded 2 billion- an increase of fifty times on the earlier issuance of the General Bank, and roughly twice the quantity of gold and silver coins in circulation.” (page 56)This made John Law fabulously wealthy, possibly the wealthiest person ever (relatively). His biographer stated that “in comparison, Apple Inc. is a rag-and bone shop.”However, the monetary policies of aggressive press printing “produced wild inflation, evidenced by the near doubling of an index of commodity prices since the start of the year.” (p 56) This had the predictable effect of people losing confidence in the currency, and capital flight began to take hold. Once this happens, the jig is usually up, and this was no exception. The bubble imploded. Law tried both doubling down on inflation, which just exacerbated the problem, and ultimately had to deal with crippling deflation.I focus on this piece of the book because of the ending, which Chancellor summarizes:“The verdict on Law and his System provided by modern economists is surprisingly favourable. Some even deny that a bubble existed in 1719…despite the fact that Law’s policies produced a surge of inflation and a great stock market crash, Ivy League academics warmly applaud his monetary notions. Peter Garber, a professor of economics at Brown University, claims that Law’s credit theory is the ‘centerpiece of most money macroeconomic textbooks produced in the last two generations’. William Goetzmann of Yale credits Law’s belief that too little money constrains economics activity ‘as the essential principle underlying the decision by the US Federal Reserve Bank today’.” (page 61)Law’s biographer notes that “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.” (page 61)Chapter 5 - John Bull Cannot Stand Two Per CentProvides ongoing evidence that perpetually and abnormally low interest rates create perversions in economies. From an article from Walter Bagehot (editor of The Economist), in 1856, he noted that:“Whenever money becomes very cheap, experience teaches us to expect that it will be misspent. John Bull, as it has been wisely observed, can stand a good deal, but he cannot stand two per cent.” (page 69)In this case John Bull (not to be confused with John Law), is just a generic name meant to represent the typical Englander. Bagehot is a focal point of the chapter, and the Bagehot Rule is often thought to have been linked to modern day monetary policy of the central bank being the lender of last resort:“The Bagehot Rule, as it came to be known, formalized an approach to banking panics…although the Bank Charter Act of 1844 limited the amount of banknotes the Bank could issue in excess of its gold reserve, the law was always suspended at moments of financial distress.” (page 75)What is interesting here is that while Bagehot’s original view is being accurately portrayed, its implementation now is completely different. Chancellor claims the outline of the policies “provided the cover” for Bernanke’s helicopter money:“During panics the Bank of England should only lend for a short period, against high-quality collateral and should charge a high rate of interest for its money…Yet Bagehot’s stringent conditions were not followed…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.” (page 76)This is the prelude of the subsequent scorching modern central bankers will get in the book. Benanke, Yellen, Draghi and the lot have radically misinterpreted Bagehot despite citing him frequently, to the point Chancellor wonders whether “any of them has actually opened the pages of Lombard Street and encountered its ruminations on John Bull and his wild investment proclivities.” (page 81)Chapter 6 – Un Petit Coup De WhiskyThe final chapter before moving into more modern history, this chapter finishes with the United States Great Depression. It is here that Chancellor links the modern concept of managing interest policies by targeting inflation levels:“The British, who were keen to return sterling to gold convertibility, wanted to avoid deflation because it involved politically contentious cuts in wages. Americans were keen to avoid a repeat experience of the severe deflation of 1921. Ben Strong at the New York Fed was converted to the new monetary policy orthodoxy, namely that interest-rate policy should be guided by the goal of price stability.” (page 86)In this link Chancellor argues that going down this path created first the Roaring 20s and then ultimately the Great Depression. A key reason for this is that the Federal Reserve was far too focused on inflation, and less around growth. Despite the US economy roaring by 8% a year from 1923-1928, the “New York Fed’s discount rate averaged less than half that number.” (page 90)The dogmatic principle of avoiding deflation is misguided. It is clear Chancellor admires Austrian economist Frederick Hayek, whom he quotes frequently throughout the book and notes made this argument in the 1920s (as opposed to his more famous peers John Maynard Keynes and Irving Fischer):“In a capitalist economy, Hayek said, continuous advances in productivity mean that consumer prices have a natural tendency to decline. During periods of rapid technological development and commodity gluts, such as the 1920s, the price level might be expected to decline quite rapidly. The pursuit of stable prices by central bankers, however, worked against this natural tendency. Monetary policy directed at stabilizing prices, said Hayek, ‘administers an excessive stimulus to the expansion of output as cost of production’.” (page 96)Thus Chancellor, who clearly agrees with Hayek, is arguing that the newly found myopic focus around price stabilization as the ultimate swing force for interest rates is misguided, as there is “good deflation” and “bad deflation”, while policy makers seem unable to distinguish between the two. Indeed, not identifying that good deflation requires higher interest rates would ultimately, inevitably lead to bad deflation:“Hayek argued that the new technologies and efficiency improvements of the 1920s brought about good deflation…when policymakers ease monetary conditions to ward off such a benign decline in price level, people are incentivized to borrow more...debt deflation starts from a position of over indebtedness- a point which Bernanke in his writings on the subject conspicuously overlooks. Thus Hayek concluded that attempts to avoid good deflation make bad deflation more likely. Furthermore, the bad deflation that appears during a financial crisis should be viewed as a symptom, rather than a cause of economic malaise.” (page 100)Chancellor finds it curious that those like Hayek, who seemed to have been proven right in his take on what should have been done to avoid the Great Depression, have been “air brushed” from history while those who lost most of their wealth and seemed to champion the policies leading to the Great Depression like Keynes are now championed.Chapter 7 – Goodhart’s LawMore historical support and analysis around Chancelor’s opinion that trying to base everything around an inflation target is a faulty proposition.Goodhart’s Law states that “any measure used for control is unreliable” and that “when a measure becomes a target, it ceases to be a good measure”. (pages 105 and 121). The chapter uses Japan in the 1980s as a corollary to the US in the 1920s:“The BOJ’s actions in the second half of the 1980s are reminiscent of Federal Reserve policy during the 1920s. Both economies experienced robust growth combined with low inflation. Both central banks directed their attention to price stability and initially ignored strong credit growth and the appearance of speculative bubbles.” (page 108)In both cases, the argument is that the central banks should have been paying more attention to underlying growth (credit/asset prices) rather than purely inflation as guideposts for interest rates.Sharp criticism of Alan Greenspan is levied, as he notes that after the Tech bubble there became a disconnect between GDP growth and interest rates that began the real estate bubble later in the mid to late 2000s.Finally, the chapter explores the curious notion that ultimately became global gospel that not only do you want some inflation, but for some reason 2% is the exact right inflation that everyone should pursue. This seemed to start in the early 1990s and has since become an obsession:“Not only did the major central banks in the developed world now have a target, but they all coalesced around the same number: 2 percent acquired talismanic significance…the number was written into the ECB’s constitution. It was constantly invoked by central bankers.” (page 120)Indeed, Chancellor is no friend of dogmatic metrics in general:“Metrics serve to stifle innovation and creativity; they imitate science but resemble faith. When an institution is guided by some specific target, critical judgment is suspended…the more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more likely it will be to distort and corrupt the social processes it is intended to monitor.” (page 120)Chapter 8 – Secular StagnationA short chapter around the flawed argument that has been used for decades that low interest rates are necessary because of ultimate population decline, e.g. a “Secular stagnation”. Chancellor finds it curious that despite this argument being proven wrong again and again, it keeps resurfacing as justification for low interest rates.Chapter 9 – The Raven of BaselAnother short chapter lays out arguments that it is credit growth and asset prices that should be monitored for interest rate adjustments, not inflation. In this chapter he cites the work of Claudio Borio and William White in the 2010s, who meticulously researched the relationship between interest rates and other factors like growth, savings rates, unemployment, etc.The underlying thesis is that monetary policy can have significant impacts on economies, which to me seems obvious but Chancellor attempts to argue that many philosophers, economists, and historians (he cites David Hume in particular) argued that “monetary policy errors show up only as disturbances to the price level, without any further consequence.” (page 131)Chapter 10 – Unnatural SelectionStrikes another blow to lengthy periods of low interest rates, arguing that the process of “Creative Destruction” that capitalism is known for gets significantly bogged down when low interest rates keep “zombie companies” alive.The argument goes that the least efficient operators are kept alive in periods of low interest rates, as they can keep tapping capital, which subsequently keeps out better operators from even participating as the “dead weight” capital hurts everyone:“Interest turns time into a cost of production. Time is money. Entrepreneurs who save time in production, who bring goods most quickly to market, emerge as winners in the game of creative destruction. Interest rations capital.” (page 141)The concept of “zombie companies”, essentially companies kept alive by very low interest rates, is illustrated in the European banking sector in the 2012 timeframe, as well the as the cash burning “unicorns” in Silicon Valley, which multiplied dramatically in the 2011-2020 timeframe.Chancellor argues these zombie companies, kept alive by low-interest rate policies, had significant detrimental effects to more healthy companies and hurt total productivity:“An increasing body of research suggests that zombies lay behind the productivity debacle. Businesses that couldn’t service their debts invested less. Zombies discouraged other firms from investing too. Zombies hindered new business formation since entrepreneurs had little incentive to enter sectors with excess capacity and miserable returns. Zombies slowed the adoption of new technologies and business practices.” (page 153)Perversely, Chancellor believes “central bankers saw the decline in productivity as a reason to extend unconventional monetary policy…low rates begot zombies, and zombies begot lower rates.”Chapter 11 – The Promoter’s ProfitAttempts to show the perverse effect that lower rates of interest don’t particularly encourage productive investment, but actually encourage financial chicanery, specifically leveraging up through debt to buy back stock:“From the turn of the century, the cost of debt in the United States was held below the cost of equity. This ‘funding gap’ provided the impetus for share buybacks…the monetary authorities had hoped that companies would use their access to cheap debt to boost investment. But a very low interest rate, combined with a tax structure that favoured debt over equity, noted the OECD, ‘works directly against long term investment’.” (page 164)Chapter 12 – A Big Fat Ugly BubbleAgain, tying low interest rates to speculation and bubbles, it delves into the very recent bubble-like environment in the 2016-2020 timeframe, noting skyrocketing home prices and parabolic moves in more speculative stocks. This chapter taps into an important concept for why interest rates impact “highflyer” stocks, namely:“Since most of their profits lie in the distant future, the valuation of technology companies (also known as ‘growth companies’) is inflated when the discount rate falls. During manias, speculators are said to engage in hyperbolic discounting’.” (page 176)The chapter also attempts to define the “bubble economy”:“The phrase came into popular usage in the late 1980s to describe Japan’s bubble-distorted economy. The baburu keiki (bubble economy) described the condition by which inflation in real estate and the stock market had entered deep into the sinews of Japan’s economy: corporate profits boosted by financial engineering; business investment fueled by warrant bonds, which linked the corporate cost of capital to the price of the issuer’s shares; and spending on luxuries…” (page 184).Chapter 13 – Your Mother Needs to DieAttacks low interest rates from yet another angle, this time from the vantage point that low interest rates essentially take away people’s choice to save and disrupt retiree’s planning, forcing them to invest more aggressively and reach for yield.“In a world of ultra-low interest rates, most households have no hope of wealth accumulation, no matter how much they save. Indeed, they are better off being profligate.” (page 192)This chapter notes the potential catastrophic damage that long term low rates can dole out to entities like pension funds, which rely on a certain asset yield to avoid large, implied pension deficits:“Growing pension deficits elicited various responses. For a start, pension providers had to put more cash into the pot. In the United States, cities and towns cut public services and sacked workers to shore up their pensions. Private companies in a similar reduced investment and cut dividends.” (page 196).Chapter 14 – Let Them Eat Credit“Usury is defined as the charging of excessive interest. But no word exists to describe too little interest.” (page 201).This sums up the chapter, as it inverts the historical thought that predatory interest rates need not be too high, but rather increase wealth disparity the most when they are too low.This chapter turns back the clock more than other chapters, reminding us first about the morality of interest from a predatory perspective (e.g. usury), then reminding us that in fact the periods of greatest wealth disparity came during periods of low interest rates:“In late sixteenth-century Europe, the entire wealth of Augsburg, a free city of the Holy Roman Empire, was concentrated in a few hands, mainly in those of the banker Jakob Fugger. The ‘astonishing feature’ of this era was the ‘lowness of the discount rates’.” (page 202)In fact, Chancellor argues that a positive feature of the Great Depression was that it “kicked off a multi-decade decline in inequality, what economists refer to as the Great Compression.” (page 203). Chancellor argues the “turning point” of this period of lowering inequality was marked mostly by the ongoing decline in interest rates starting in the 1980s.Chapter 15 – The Price of AnxietyI believe this chapter is the first one to discuss an obvious component on the value of interest, namely that interest is necessary because of potential loss by the borrower, although it’s framed here as the “price of anxiety.” In other words, people need to be compensated for the anxiety they feel about potentially losing their loan.The chapter, like the previous one, turns back the clock and traces the roots of higher interest of more risky loans back to the Babylonians, Greek and Romans, who “all charged higher premiums for loans on sea voyages.” (page 219) Sea voyages were thought to be much riskier than other forms of loans.The chapter tries to tie a corollary between interest rate spreads and insurance premiums, stating “the spread between what the bank charges for its loans and pays on deposits is akin to an insurance premium. In fact, bonds can be replicated with insurance contracts, known as credit default swaps (CDS). (page 219) The premium increases due to the riskiness and anxiety level.Once again, low rates are the bogeyman for periods of irrational exuberance:“Credit booms occur at times of easy money, when financial risks are mispriced and market participants believe that the authorities will protect them from loss” (p 220), e.g. when the anxiety is lower because someone is ready to protect you in case of catastrophe (e.g. the Greenspan Put).The remaining piece of the chapter outlines the natural outcome first introduced in chapter 13, whereby as yields stay unnaturally low, those who need returns/yield, will find increasingly absurd and unsustainable ways to achieve it. This gets at the “negative yield” phenomenon, and how that was possibly an acceptable outcome for a bond investor. For instance, in Japan:“’Yields don’t matter’, declared a Tokyo insurance executive as the redemption yield on a thirty-year Japanese government bond turned negative. This comment was not as crazy as it may appear, since any loss of income experienced by the bondholder was more than offset by the prospect of capital gains as interest rates declined. As Japan embraced negative rates, its government bonds were delivering their best returns in decades. The prospect of further rate cuts, as interest rates moved deeper into negative territory, only whetted appetites.” (page 225)This reminds me of the housing build up and ultimate bust in the 2003-2007 timeframe, where rental yields got increasingly microscopic, but all was well while prices continued to rise…until they didn’t. As should be obvious, the unwind of this trade and its level of pain will be proportional to how deep and prolonged the negative rates get.Chapter 16 – Rusting MoneyContinues the previous chapter’s discussion of negative rates. “Negative rates were intended, as Harvard’s Kenneth Rogoff put it, to ‘turbocharge the economy out of a deflationary recession’. But they failed to live up to that promise. In fact, they exacerbated the problems already produced by ultra-low rates.” (p 245). One idea was that money was essentially “rusting” in periods of negative rates, and consumers would not want to pay for their deposits, which would stimulate lending and then the economy at large.One reason it failed to do so was it did not actually incentivize banks to lend, as would have been the hope. With very low rates across all duration spectrums, banks core business was essentially under attack, as the spread they could generate was increasingly low:“Quantitative easing boosted asset prices and shrank credit spreads, but most of this newly created money wasn’t lent to consumers or businesses but was deposited by the banks at the Federal Reserve. That fact that the Fed in 2008 started paying interest on excess reserves (i.e. bank deposits at the central bank) gave banks even less reason to lend. The circulation of money through the economy slowed.” (page 236)The final pages of this chapter make some interesting points about how consensus around what is crazy or even possible can change quickly, a good life lesson for those who fancy themselves contrarians (e.g. narratives can and do change radically even when it seems impossible for them to do so, just give people the right incentives to rationalize it).“Up to this moment, the notion that interest could be charged at a negative rate had only been proposed by monetary cranks…or contemplated as a thought experiment by a handful of economists…the economists’ verdict was not positive…even the nineteenth century radical Henry George thought that capital could not be maintained if interest rates fell below zero. George’s contemporary Eugen von Bohm-Bawerk believed that negative interest rates were against human nature. The great Swedish economist Gustav Cassel…dismissed the absolute absurdity of thinking that the rate of interest could ever fall to zero or less. (page 247)However, fast forward to 2009:“The Riksbank’s Deputy of Governor, Lars Svensson, downplayed the move: ‘There is nothing strange about negative interest rates,’ Swenson told the Financial Times. Nothing strange perhaps to this ‘world-renowned expert on monetary policy theory.’” (page 247)Chapter 17 – The Mother and Father of All EvilThe last two chapters look more closely at two countries, first the United States and then China.Chancellor argues the United States is in a unique position in modern history as the owner of the Dollar Standard:“Central bank reserves are mostly composed of dollar-denominated securities (US Treasury bonds and agency debt), which, unlike gold, can be issued without limit…there is no limit on how many dollars flow abroad nor how much the United States borrows from foreigners.” (page 251)The US has unique power in that “when the United States adopts easy money it unleashes a global monetary plague.” (page 252)The argument seems to go like this:a) Artificially low yields on dollar assets (e.g. treasuries) produces demand for cross-border assetsb) “Carry Trade” demand surges in markets with higher yieldc) This creates overheating in Emerging Markets, e.g. inflation, which is hard to combat because by raising rates further it makes the carry trade even more attractiveThis overheating/inflation dynamic can continue until there is a more severe currency crisis, acting as the crescendo to exit that country and move to another country with a good carry trade. This cycle seemed to manifest itself in certain higher growth emerging market countries like Brazil and Turkey, which had large boom/bust cycles in the 2010s.A tertiary effect of this is that low US interest rates increased globalization. The chapter ends with an uneasy cautionary quote from Peter Thiel:“All great historic bubbles, from the Mississippi Bubble to the current day, had coincided with advances in globalization. The previous quarter of a century had produced a string of bubbles and busts that ‘represent(ed) different facets of a single Great Boom of unprecedented size and duration.’ Either globalization would succeed, said Thiel, ‘or it is the final and greatest bubble in history.’ (page 263)As we consider growing backlash to (illegal) immigration and many calling for an unwinding of globalization, as happened in the 1930s after the Great Depression, it does make one wonder what unanticipated consequences this “reshoring” narrative might have on both the US and the rest of the world.Chapter 18 – Financial Repression with Chinese CharacteristicsChancellor is an equal opportunity monetary critic, and he certainly does not spare China of his wrath in the last main chapter in the book. Indeed, the implication is that China may be the worst offender of “financial repression” of any modern-day country (financial repression being defined as keeping interest rates below inflation, e.g. negative real savings rate).Indeed, the chapter notes that “although paper money was invented in China…from having begun as a brilliant solution to a shortage of copper cash, paper money gradually turned into a bureaucratic monstrosity that hampered the productive forces whose growth it had originally done so much to foster.” (page 265)The premise and contingency of financial repression in China starts with the idea that the country can, for the most part, control capital flight away from the country. In other words, interest rates can be implemented and controlled and, unlike in the United States, it is very difficult to take your money and invest elsewhere. He goes on:“The ‘Big Four’ banks were majority owned and tightly controlled by the state. The central banks set the deposit rate below China’s rate of economic growth, and often below the rate of inflation. Banks lent to state enterprises at below market rates. Since the deposit rate was fixed even lower, the banks were guaranteed fat profits. Government-controlled corporations used the cheap credit they received, often favoring sectors selected by Beijing’s economic planners. Banks and state enterprises were the main beneficiaries of financial repression; household savers were the big losers.” (page 266)As a household saver, your interest rate was fixed well below underlying growth and inflation, hence financial repression. This explains in part the frequent booms and busts in China, most notably in the real estate market (but also the stock market), as savings are accumulating rapidly but there is a desire to earn higher than a negative real rate. Chancellor notes there was “always a bubble in China”:“Over the previous years a bewildering array of mini-bubbles had popped up across the country, ranging from a caterpillar fungus with aphrodisiac properties to garlic bulbs; from vintage art to fine china; and bubbles in just about every industrial commodity, from copper to iron ore.” (page 271)To keep interest rates low the currency was manipulated, pegged to the dollar so that it would not appreciate rapidly, or at all (meaning China had to buy treasuries), so that China could feed its export machine, primarily to the United States. The effect of this was China was “lending indirectly to American consumers for them to buy its exports.” (page 267)The cycles in China were intense, as the real estate bubbles would build rapidly and then need to be pricked by regulation. However, there then needed to be stimulus to keep the real estate implosion from massively disrupting the economy and (possibly) leading to social revolution. So, an ongoing theme was extraordinary build outs of cities, airports, trains, bridges, etc.I believe the China ghost cities are fairly well known to people, so I won’t add quotes from the book on that, but it does get at the unsustainability of the entire strategy, namely that at a certain point incremental investment becomes incredibly inefficient:“As investment climbed to unprecedented levels, the efficiency of investment- what economists call the ‘incremental capital to output ratio’- spiraled downwards. All those immense sums spent on bridges, high-speed trains and roads were failing to generate the much-touted improvements to productivity. The People’s Republic was trapped on an investment ‘treadmill to hell’. But stepping off the treadmill would amount to ‘drinking poison to cure the curse.’” (page 279)The final part of this chapter highlights the similarities between the United States and China, in that both believed that central planning around specific monetary metrics was critical and, more notably, as unforeseen problems emerged, both believed they need to double down on said centralized planning:“The legacy of China’s financial repression was, as President Xi told the National Congress in 2017, a ‘contradiction between unbalanced and inadequate [economic] development and the people’s ever-growing needs for a better life’, which, in turn, provided Xi with a rationale for further advancing the role of the state.” (page 289)ConclusionThe goal of using monetary policy to flatten out economic cycles was/is riddled with unforeseen consequences, but the leaders either couldn’t attribute their own actions to those consequences or were simply fearful that the populace would not tolerate a more significant downturn, with each doubling down on policy producing a larger potential implosion. Chancellor here quotes his favorite economist, Frederick Hayek:“The more we try to provide full security by interfering with the market system, the greater the insecurity becomes; and, what is worse, the greater becomes the contrast between the security of those to whom it is granted as a privilege and the over increasing insecurity of the underprivileged.” (page 296)And here he finally ties it all back to the interest rate:“Instead, central planning in the twenty-first century has involved manipulating the most important price in a market-based economy, the universal price, namely the rate of interest. Interest lies at the heart of capitalism. Interest rates are the traffic signals that guide the market economy…turn off those signals and pile ups occur.”Taking the Conclusion (and Postscript) chapters in, it’s hard not to feel a little pessimistic about the odds that the Big One (economic blowup) has yet to occur, as the root problem of micromanaging interest rates to the downside still was not addressed, and by all accounts members of the Fed and global central banks still have not changed their thought process and instead are continuing down the path that John Law blazed, ultimately catastrophically.Chancellor opines about the potential of cryptocurrencies, while acknowledging their current limitations, but seems intrigued by the concept of getting back to a system without the inherent temptations that “unlimited money printing” promotes:“One advantage (of centralized digital currency) is that central bankers would no longer be able to pursue an active monetary policy. The cost of borrowing would more accurately reflect the supply and demand for actual savings. Guided by the market’s invisible hand, the rate of interest would find its natural level (page 312).

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The Price of Time

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The Price of Time

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