When the price of time is set at nothing, finance becomes absurd

“The Price of Time: The Real Story of Interest” by Edward Chancellor

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 banks 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.