Guest: Edward Chancellor – Author of The Price of Time
Even the Bible mentions interest rates and the debt jubilee
Debt jubilee = official forgiveness of debt by the ruler
Common when new ruler took power
Why debt jubilee? Because interest rates compound, led to debt bondage / labor slavery
Modern debt jubilee occurs through inflation (financial repression, where inflation > interest rates)
Could say today we’re in early stages of a debt jubilee
Iceland 2008 financial crisis – borrowed reckless during global credit boom
Much of debt was wasted on poor investments
After 2008 crisis, government put banks into receivership and defaulted on foreign debt
Default is another form of debt jubilee
Seneca the Younger
Advocates stoicism, but also tutor to Nero, earned a great fortune, gave lavish parties – many contradictions
“Time is man’s most precious possession”
Interest = price of time
This notion was revived in Renaissance Italy
How people began to justify interest rates
Time value linked to human’s natural impatience – we prefer having things sooner rather than later
eg, a factory – the earlier and faster you produce things, the more valuable
Should be incentive to use time wisely
Demurrage – medieval ships were charged if they took too long to unload their goods
Efficient economies are driven by a charge on time
If we didn’t have that charge, people would be slower, less efficient
Interest rates are linked to time preference
When young, internal interest rate is higher, more keen to borrow, more impatient, and vice-versa when older
John Law
“Is this guy for real?”
Son of Edinburgh goldsmith (back then, goldsmiths were a form of proto bank)
Law inherits some money
Becomes a dandy / fop in London
Loses fortune gambling
Duels with another dandy, Law kills him
Law arrested, escaped jail, flees to continental Europe
Toured Europe for 20 years
Ends up in Paris
Improved at gambling, very good at probabilities
Develops interest in economics
Proposes a land bank – lend money against land
Argues money (gold or silver) was just a yardstick of value
First “monetarist” economist – can replace gold or silver with paper currency
This will bring rates down, can print more money
This will bring economic prosperity
Starts a private bank in France
Takes over a French trading company, acquires French mint, tobacco monopoly, owned Louisiana Purchase land rights – extensive holding company
Turns private bank into a central bank (the Bank Royale)
He goes broke because he issues paper currency and withdraws gold and silver from circulation
Results in massive increase in money supply
Rates drop from 8% to 2%
His final act – takes over entire French national debt – converts all bondholders credit into his company’s shares (the Mississippi company) – like a QE operation
There’s an extraordinary speculative boom – enormous fortunes are made – the word “millionaire” enters the lexicon
John Law becomes the richest person ever
Considered a great statesman
Then it all falls to pieces – general inflation rises, people sell his company’s shares
Company goes bankrupt, he has to flee, leaving behind his family
Wound up in Venice 8-9 years later, went back to gambling
“A brilliant eventful life”
Too ambitious, moved too quickly, but didn’t have eye for details
His motivation was to bring down interest rates – thus provided framework for modern central banking – was 250 years ahead of his time
Modern lawmakers don’t seem to notice that Law’s experiment ended in resounding failure
Louis 14 – sun king
Huge debt due to wars with Britain, Holland
French debt = 100% of GDP
Modern fiat system is inherently inflationary
“2% tipping point”
Walter Bagehot – Economist editor
Noted that speculative manias coincided with periods of low rates
Current research indicates 3% seems to be threshold
Interest = price of anxiety or price of risk
Policymakers think you can lower rates as lever, but you’re playing with price of risk, and you won’t know where the risk is building
Also encourages misallocation of capital
Concept of “Natural rate of interest”
One definition: “Return on capital of an economy without money”
Observe asset price inflation, credit booms – as indicators whether policy rate is too high or low
Hadley – interest rates encourage natural selection
The higher the hurdle rate, the fewer that survive
Schumpeter – creative destruction – natural process of economic sclerosis, need this destruction to maintain a healthy growing economy
Low rates create low productivity, creates negative feedback loop
Academic economists have too abstract a view of economy, without looking at observed reality
An Assyrian clay tablet dating to around 2800 B.C. bears the inscription: “Our Earth is degenerate in these later days; there are signs that the world is speedily coming to an end; bribery and corruption are common; children no longer obey their parents; every man wants to write a book and the end of the world is evidently approaching.”
// almost certainly an apocryphal quote, but included in book anyway
Final realizations —
Realized how central interest rate was to all of human life, puts price on time, and especially to the capitalist system
If you don’t apply a discount rate to income / cash flow, you can’t price something accurately
“We’ve lost sight of this most important economic variable”
Jim Grant: interest is the universal price
Because we’ve lost sight of it, we’ve gone down a pretty bad route as a result