REVIEW - "The Price of Time" by Ed Chancellor

Read time: 11 mins

Similar to the article I wrote on Arthur Burns, this is a slightly longer read and you should approach it as though you were picking up a chapter of a book. Sit down, take your time and absorb the content. After all, I am trying to summarize 400 pages of content for you!

Ultra-low interest rates have played a major role in shaping the global economy over the past three decades.

A key relationship that I always keep in the back of my mind is that between interest rates and asset prices, they are inversely correlated.

The effective Fed Funds rate has declined over the last 40+ years from 18% down to 0%

Meanwhile, the Wilshire 5000 Total Market Cap (a proxy for total investible US market cap) has risen from 1.3T to 48.5T, a 3400% gain.

While on the surface that may appear to be a positive thing, it is worth noting that the 3600% gain in stock market cap is 5X the growth in US GDP over the same time frame, which was of a total 700%.

Even more interesting is the fact that in 1980 the Wilshire 5000 total market cap was 1.3T compared to a 3.3T economy (GDP) - almost a third of the size.

As of Dec 2021 the total market cap was 48.5T, or more than twice the size of the real economy, GDP being 23T.

If we take the inverse relationship between asset prices and interest rates a step further another interesting fact emerges.

The wealth gap between the top percentile and everyone else widens, as interest rates decline and asset prices rise. This doesn’t take much explanation as the top percentile undeniably owns the largest share of assets and consequently benefits the most.

The above analysis is somewhat of an oversimplification, but it is a good starting place from which to dive into some of the thoughts shared by Chancellor in his newly released book “The Price of Time.”

He states that his book was inspired by the conviction that ultra-low interest rates were responsible for many of our current woes, whether the collapse of productivity growth, rising inequality, unaffordable housing, the loss of market competition and financial fragility.

While interest has had its fair share of defamation over the centuries, particularly in the early Christian age where it was maligned as usury, the fact remains that credit and interest are older than money itself.

The fanciful tale taught in all history and economic books, that barter precedes money has long been disproven, and it is now generally accepted that various forms of credit were how early human communities transacted.

If you want to learn more on this topic you should read “Debt: The first 5000 Years” by David Graeber. I personally found it one of the most interesting books I have read in the last few years.

Chancellor notes that:

Below is a chart of interest rates over the past 5000 years.

As Ben Franklin put it “Time is precious. Time is money - Time is the stuff of which life is made of.” It follows that interest is “natural, just and legitimate, but also useful and profitable, even to those who pay it”

Today this concept is widely understood and appreciated as the Time Value of Money.

But let us leave the history of interest aside and skip over the debate as to whether it is right or not to charge interest, and get to the heart of the argument outlined at the start, the consequences of low-interest rates.

At the start of the book, Chancellor brings up a discussion in the 1800s between Proudhon and Bastiat, where the former argues for the abolition of interest while the latter against it.

For the last two decades, we have had 0% interest rates.

Let us read what Bastiat warned the risk of abolishing interest might be and see if any of his predictions have come to pass.

On abolishing interest Bastiat states:

“The rich will indeed borrow gratis, while the poor will not be able to borrow at any price.

When a rich man presents himself at the bank, he will be told: You are solvent, here is the capital, we lend it to you for nothing.

But let a worker dare to show his face. He will be asked: Where are your guarantees, your lands, your houses, your goods?

I have only my arms and my probity? [The worker replies.]

That does not reassure us, we must act with prudence and severity, we cannot lend to you gratis."

"The propaganda of free credit is a calamity for the working classes” Bastiat concluded. There would be fewer businesses, while the number of workers would remain the same. Wages would decrease. If the bank lent freely, there would be a deluge of paper money. Order would be lost, and the country would exist perpetually on the edge of an abyss.

Looking at the world today, it seems to me Bastiat was quite insightful in his views and indeed anticipated many of the negative consequences of 0% rates.

One of the most insightful realisations of Bastiat in my opinion was that low rates would mean the wealthy and asset holders would be able to take out infinite amounts of credit at low or no cost, while the asset poor would be charged comparatively higher rates, or not be able to access credit at all.

One of the main reasons we have mega corporations today is that they have been able to finance their activities and acquisitions at practically no cost, a significant advantage over smaller companies who do not have access to the same level of credit.

Another astute observation was that the value of workers would decrease.

This proved to be very much the case, for if we look at the share of corporate profits vs employee compensation over the last 40 years we find the same inverse relationship I highlighted at the very start.

Over the last 40 years:

Rate Down = Asset Prices Up

Rates Down = Inequality Up

Rates Down = Corporate Profits Up & to the detriment of worker compensation.

The real question is why, despite the undeniable above observation, is the world stuck in a perpetual situation where low rates beget even lower rates? A vicious circle from which we seem unable to break through.

Bastiat had the answer to this too.

On top of all the above, he observes that “a country would exist perpetually on the edge of an abyss”.

Every time central bankers have tried to raise rates an economic or financial calamity has occurred, forcing them to intervene and expand their ultra-easy monetary policy further and push us further out on the risk curve.

The era of ultra-low monetary policy began in the 90s under Greenspan, but it took on a whole new meaning after the “Greenspan Put” in 1998 - an unwritten contract between the Federal Reserve Anand Wall Street that committed the Fed to intervene to halt market declines.

To this day, the prevailing economic mantra remains that laid out by Ben Bernanke during his tenure at the Fed, that “monetary policy shouldn’t act pre-emptively against asset price bubbles but should deal with the aftermath”, if necessary “by dropping helicopter money”.

I must admit helicopter money was a smart invention.

Bernanke truly deserves a Nobel Prize in economics!

Economists at the BIS (Bank of International Settlement) in the years following the great financial crisis were some of the few exceptions to the establishment view and pointed out the negative consequences of helicopter money.

Claudio Borio (whose papers you should read!) of the BIS observed that the Federal Reserve's reflexive tendency to ease monetary conditions whenever markets became turbulent encouraged yet more risk-taking. Furthermore noting 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.

Financial imbalances - a polite term for credit booms and speculative manias - tend to form during periods of low-interest rates and low inflation, he noted.

Before the financial crisis, global interest rates were low both in real terms and relative to the growth rate of the global economy. Credit booms and real estate bubbles often produce nasty economic shocks and are followed by weak recoveries. The post-Lehman economy conformed to earlier precedents, notably Japan's after 1990. Central bankers responded to economic stagnation after 2008 by pushing rates even lower. Thus, low rates begat low rates.

The result was that economies stagnated in the 2010s and failed to gain any real momentum or growth.

Many reasons were conjured to explain the slow growth of the last decade, the narrative of secular stagnation emerged, deflation, demographics and other factor were all pointed at.

But Debt was the missing link in the secular stagnation narrative, said Borio. The path to ever-lower rates traversed a mountain of debt.

The residue of debt left behind by the crisis produced what Borio called a financial drag.

Ever lower interest rates are needed to sustain a rising stock of debt. A vicious cycle begins, with more debt requiring lower rates, and lower rates resulting in yet more debt.

Ultra-low rates, being the hair of the dog, are no cure for a debt hang-over. 'After all' Borio asked "if the origin of the problem was too much debt, how can a policy that encourages the private and public sectors to accumulate more debt be part of the solution?"

Once the economy enters a 'debt trap' it becomes harder to raise interest rates without causing huge damage.

Moreover the issue Borio observed "It is not so much the overall amount of credit but its quality”.

An unlikely candidate summarised things quite well.

Larry Summers in 2019 stated “Will they [Central bankers] not consider the possibility that ultra-low nominal yields might reduce aggregate demand while breeding financial instability, bank failure, zombification and reduce economic dynamics”.

Before you start thinking too highly of Summers, it should be noted that during the era of Greenspan and Bernanke, he maintained the same establishment view, it was only after his hopes of becoming the next Fed Chair were disappointed that he turned sour.

So we talked about ultra-low rates bidding asset prices to the moon, we discussed the impact on inequality, we hit on how low rates are proportionally disadvantageous for workers, and we’ve delved into the tendency of easy money to breed financial instability and inflate the overall stock of debt.

The last point I want to make from Chancellors' book is one on productivity.

Schumpeter will forever be remembered by history for coming up with the idea of Creative Destruction when he describes capitalism as a "process of industrial mutation ... that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism."

Chancellor argues that “interest is not a deadweight but a spur to efficiency.”

Investor James Grant puts it well when he compares the rate of interest to a metronome whose beat helps musicians to play in time. "Properly pitched interest rates contribute to a sound tempo of growth" he writes. Economic activity slows as the interest rate is lowered. Adagio ... Larghetto... Lento ..Largo ... Grave ... Adagissimo ... Larghissimo - the last tempo being 'very, very slow'. At zero interest rates, the economy progresses at the solemn pace of a funeral march.

After the Japanese bubble popped interest rates were lowered to zero and have been kept there for the past 3 decades, the result has not been growth but to the contrary, stagnation.

“Corporate profits and returns on capital declined. Productivity growth suffered. Deflation lingered. With the forces of creative destruction stilled Japan Inc. Appeared increasingly sclerotic.”

After the 2010 Sovereign Debt Crisis in Europe by 2015 it was estimated that European Banks had more than 1 trillion of bad debts, a twofold increase since 2009 and roughly equivalent to a tenth of private sector loans.

So according to Chancellor, and I dare say I largely agree, low rates allowed zombie companies to continue to exist.

Bad money crowded out good money and thus hampered real growth and productivity gains.

The last and final point I want to make is on Unicorns because another thing that low rates have allowed is for profitless tech apps to be funded in perpetuity while crowding out real-world small businesses.

Uber raised $20 billion from investors. In the four years before it's IPO, losses totalled more than $14 billion. Uber was often described as a disruptive business. 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 maximise 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."

I will conclude by using the words of a Tech industry insider:

“Basically the Federal Reserve is printing money and a lot of money is making its way to venture funds and from there into the pockets of a bunch of kids who are building start-ups in San Francisco. As long as the Fed keeps printing money and the stock market keeps going up, the party will continue”

Well, you may be pleased to know inflation is no longer allowing the party to continue and the Fed has now done a full 180 inversion of course and pulling every other central bank in the world with it.

The problem is that “we live on the edge of the abyss” and taking the heroin away from the patient is going to be far from easy.

Thank you for reading and I would encourage anyone who has found this article enjoyable to read The Price of Time by Ed Chancellor, for in this article I have but scratched the surface.

Antonio C. Nobile

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