The Price of Time

 (Half-way) First draft: 12/26/2022
Second draft: 12/31/2022

General notes:

• Of all the books I’ve ever read, this is the book I wish I wrote although, on seeing the length of its bibliography, I don’t think I would have been able to produce in my lifetime anything half as comprehensive. It's a masterly work. 

• Several books that I've read/summarized or was planning to read/summarize (John Stuart Mill, Ludwig Von Mises, Friedrich Hayek) show up in this one :')

• This book is great at listing who said what about major events, whose predictions were right and whose were wrong. So many economists and financiers are quoted verbatim.

• This book could use some editing to make arguments easier to follow especially toward the ends of parts 2 and 3.

• Chancellor is a quintessential journalist in that he uses different labels for the same subject to add variety to his paragraphs in direct opposition to McCloskey’s advice for repetition that helps the reader stay on track. It bothered me throughout the book, but case in point on this annoying tendency which comes off as a mad flex is on page 298 where Chancellor refers to Adam Smith as the author of the Wealth of Nations (sure, OK, every 9th grader knows this) but also the Sage of Kirkcaldy. Too much, my guy. I’m a PhD student in economics and even I didn’t know the bloke was born in some Scottish backwater called Kirkcaldy. Or I didn't know "sage of" was a label for notable people. Now that my rant’s over, I do find it a fun tidbit I should say--awkwardly presented as it was.

Part 1 Of Historical Interest

The book is mostly chronological. In part one, Chancellor walks through the history of usury in theory and practice. He does more eloquently what other authors such as Gelpi and Julien-Labreuyere did before the ’08 crisis (see my summary of their work here).

He first shows that lending at interest was common as far back as Babylonian times. He argues that episodes of debt cancellation prove that debt crises happened even then. Several legal codes such as the code of Hammurabi also testify to the importance of ancient lending at interest. He points to research arguing that the level of interest is not determined by real factors but by the ensuing monetary regime. Interest is necessary, he argues, quoting various economists and thinkers across the centuries.

In the second chapter on selling time, Chancellor describes the history of religious bans on usury as a blasphemous pricing of time. He makes the case for the importance of interest in business transactions and cites cases of regulatory evasion. As one might expect he comes to the distinction between commercial and consumer lending and argues that even consumers, who are not producing anything of value to later be sold, have a time preference for immediate consumption hence their paying to bring future consumption into the present is justified. (My two cents: one notices so far in this book a dearth of material discussing usury from outside the Western tradition. Granted, Western thought on usury has justifiably occupied entire careers in its own right.)

Chapter 3 concerns 17th-century England when the Bubonic Plague and the wealth of neighboring Holland inspired heated debates about the appropriate level of interest among English thinkers including Josiah Child of the East India Company, Lord Chancellor of England Francis Bacon, MP Thomas Culpepper, and the “father of liberalism” John Locke. Looking across the English Channel at Holland, they debated whether low interest rates were the cause or consequence of Dutch wealth. What Chancellor derives from these debates is that rates should be neither too high nor too low. A natural rate r* must be targeted though it is impossible to observe. Enter economist Knut Wicksell who argued that deviating from this natural rate leads to changes in prices. Low interest rates spurred bubbles and inflation whereas high interest rates caused deflation. Interest rates were both the cause and the effect.

Chapter 4 takes the reader into the saga of John Law who introduces the question of a money supply. Law moved from the English Isles to France where he set up a bank, eventually took over the Mississippi Company (France’s Company of the Indies), and then nationalized it to create the largest financial company the world had known until then. In 1719, Law began printing paper money to lower the interest rate thereby sending Europe into a speculative frenzy that came crashing down by 1720 soon after the merger was completed between the bank and the Mississippi company. In the meantime, however, prices of real assets also rose. Soon after, inflation ensued, and the currency lost its value in trade. Law attempted deflationary measures, but he was met with riots and was eventually sacked as finance minister. Chancellor argues that the modern incarnations of Law, the prophets of easy money, are Draghi, Yellen, and Bernanke.

Chapter 5 introduces the famed Walter Bagehot and addresses why low interest rates can be intolerable. The chapter lays out what happened in the 1825 crisis regarding speculative trade in South America. Rates in Europe were so low that investors sought higher yet riskier returns overseas as they later did in Egypt. Bagehot writes about this in 1852 where he introduces the fictional “John Bull” who resorts to risky investments when local interest rates hit two percent. Bagehot spotted a connection between manias and easy money (low interest rates) in the Tulip Mania of the 1630s, the South Sea Bubble of 1720, the canal mania in 1790, the speculative trade with South America around 1800, the railway mania of the 1840s, and the collapse of Overend Gurney in the 1860s. Bagehot missed the Barings crisis of 1890 as he died in 1877. Chancellor defines the “Bagehot rule” as the policy where a central bank operates as a lender of last resort (for a short period and only against high-quality collateral at high interest rates). Policies after the '08 crisis followed the Bagehot rule somewhat; only they introduced a unique fear of deflation.

Chapter 6 covers the Great Depression which is prefaced by the failure of the Knickerbocker Trust Company in 1907 and the resulting establishment of the American Federal Reserve, intended to fine-tune monetary policy. After WWI, the Fed raised interest rates and the economy contracted until 1922 when the gold standard was replaced with the gold exchange standard whereby government securities were counted as reserves alongside gold. This new regime politicized monetary policy, meaning it was whimsical and hence bad, but it also included Wicksellian anti-deflationary measures. The 1920s featured notable price stability but the Fed flooded the market with money as it tamed fluctuations in interest rates caused by the agricultural cycle. This extra money caused interest rates to drop. A stock market frenzy unfolded (i.e., the Roaring Twenties, featuring the largest skyscraper boom and Carlo Ponzi himself) and culminated in the Great Depression. The straw that broke the camel’s back was a reversal of the easy money policy (raising interest rates) in the US in February 1928 which caused money to flow back from Europe. Europeans previously had American money with which to buy US products but now the reverse held, and US production slowed down. Chancellor is careful to highlight what different economists, financiers, and central bankers were saying at the time. On one side were Irving Fisher and John M. Keynes who argued against deflation and on the other side were Friedrich Hayek, Joseph Schumpeter, and Wilhelm Ropke who saw deflation as a painful cure to the ills wrought by excessiveness. Ben Bernanke, speaking on this in 2002, noted that "properly understanding the Great Depression was the Holy Grail of macroeconomics."

Part 2 How Lower Rates Begot Lower Rates

Part 2 focuses on current affairs. Chancellor covers the modern obsession with inflation targetting, volatility, inequality, bubbles, and regulation.

Chapter 7 is a polemical one. In it, Chancellor describes the “fanatical” focus of Bernanke, Yellen, Lagarde (ECB), Kuroda (BoJ), and Draghi (Bank of Italy) on inflation targeting in the lead up to and aftermath of the 2008 financial crisis. Two percent inflation was the golden rule. Since the 90s, central banks around the world had been targeting inflation using easy money (low interest rate) policies while ignoring other economic indicators. Hence the chapter title, Goodhart’s Law. Charles Goodhart of the London School of Economics theorizes that any measure used for control is unreliable. This law paralleled historian Henry Muller’s observation that “anything that can be measured will be gamed.” Not all economists supported this obsessive inflation targeting, Chancellor points out. Former chief economist of the Bank for International Settlements William White, former Fed chairman Paul Volcker, former governor of the Bank of England Mervyn King, historian Philip Mirowski, UCLA’s Axel Leijonhufvud, and a survey of academic economists were all skeptical if not critical of the obsession with price stability.

Chapter 8 is a collection of wide-ranging opinions on today’s economy. Chancellor lists opinions by UChicago’s Victor Zarnowitz, Harvard’s Larry Summers who borrowed the notion of secular stagnation from Alvin Hansen, Keynes, Schumpeter, economist George Terborgh, Warren Buffett, social theorist Jeremy Rifkin, Northwestern University’s Robert Gordon and Joel Mokyr, and Stanford’s John Taylor. Some said it was demographics, some said it was the rapid development of China, some said it was the changing nature of US firms especially tech firms, some said it was excess savings (a savings glut). (We do not know what's happening, it seems.)

Chapter 9 sets the stage for the remainder of part 2. The Raven of Basel (the chapter title) is Claudio Borio who succeeded William White as chief economist at the Bank for International Settlements. Like Hyman Minsky before him, Borio is unorthodox. He argues that stable prices do not indicate that market rates are at the equilibrium price level, the natural interest rate, r*. With his colleagues in a series of papers, he showed that credit growth and asset prices mattered, and that interest rates were mainly a function of the monetary policy regimes (easy money, gold standard, Bretton Woods, Babylonian times, etc.). He believed monetary policy was out of ammunition because under the current regime, lower rates begat lower rates and the zero lower bound was already breached in many countries.

10: capital allocation

Chapter 10 is where Chancellor laments the current state of western economies, infested with zombies (unprofitable companies propped up with cheap money and unable to meet their interest payments with profits). The list includes tech unicorns that operate without profit and without end. Two sentences summarize this chapter by invoking Joseph Schumpeter’s notion of creative destruction, the lively dynamism that capitalism is supposed to embody. “The lowest interest rates in history put the break on Schumpeter’s evolutionary process. Creative destruction was replaced by unnatural selection [the chapter title] and capital destruction.” Macroeconomic models could not capture the misallocation of resources to zombie firms because they revolved around a representative firm. (Need to verify this. See Borio’s 2018 BIS speech “blindspot in macro”). Chancellor closes the chapter with an interesting analogy between fighting forest fires and fighting the business cycle. In both cases, federal intervention is argued to make matters worse. Dying shrubs and weakened trees—that crowd out forest area and would normally be burned in natural forest fires—are akin to zombie companies crowding out resources among healthier businesses. Killing the fire is tantamount to propping up businesses that ought to fail.

11: financing

Chapter 11 addresses the rise in financialization among firms not traditionally involved in finance such as General Electric and Kraft Heinz. Chancellor’s arguments in this chapter line up well with Adair Turner’s Between Debt and the Devil which I also summarize on this website. The crux of the argument is that low interest rates have incentivized corporate managers to jack up their stock prices to the detriment of operational fundamentals. Chancellor also points to the obsession with shareholder value as a problem (although the obsession over shareholder value has recently subsided after being promoted by countless economists and pundits for years, culminating in 2019 Business Roundtable announcements on its harms). The title of the chapter (Promoter’s Profit) comes from the former German finance minster’s 1910 book called Finance Capital which points to a relationship between gains on leverage and periods where interest rates are low compared to the returns on investment. Leveraged buyouts, mergers, and acquisitions as well as stock buybacks are the main methods that Promoter’s Profits are extracted in a low interest rate setting. Unique to this chapter are an idea and a quote: economists Gianluca Benigno and Luca Fornaro introduce the idea of a “financial resources curse” analogous to the “Dutch disease” and economist Jan Toporowski suggests that “in an era of finance, finance mostly finances finance.”

12: capitalization of wealth

Chapter 12 is about the bubble we’re currently in. Chancellor partially blames low interest rates for the hype around cryptocurrencies, assets without cash flow hence no rational valuation. He also blames low interest rates for bubbles in commodities, real estate, stocks, and profits. He quotes a personal conversation he had with Paul Volcker not long after a Federal Reserve gathering where the idea of a current bubble was brushed off. In public, Volcker did not deny that the US economy was in a bubble, but later confirmed in private with Chancellor, the author. Donald Trump described this false economy best when he called it a “big, fat, ugly bubble.”

13: savings

Chapter 13 is the most morbid and impassioned. In it, Chancellor argues that low interest rates have reduced savings and thrown a wrench in retirement plans. Premiums have gotten more expensive as interest rates have stayed low, and insurers and pension providers face deficits in numerous countries. Struggling under deficits, one pension manager commits suicide, and another tells his client “I’m sorry but… your mother needs to die,” giving this chapter its title. Hedge fund manager Michael Burry claims that zero interest rate policies broke the social contract for American retirement savers. (A very grim picture that makes one wonder how debates around immigration and nationalism relates to all this.)

14: wealth distribution

Another morbid chapter is chapter 14. Chancellor points out that while high interest rates were historically condemned as exploitation of the poor by the rich, contemporary low interest rates advantage the rich using the poor’s money. Chancellor shows just how rich the rich have gotten and how poor and the poor have gotten citing numerous anecdotes and studies. As in the savings chapter, Chancellor argues that low interest rates begat inequality which in turn begat lower interest rates (via a stagnant economy and wages). Most notable in this chapter is that, as the average reader probably already knows, even the rich have noticed that the pendulum has swung too far in their favor and a feudal society is taking shape. It was obvious after the ‘08 crash that “banks with busted credit got bailed out [with zero-cost loans from the Fed], while homeowners with busted credit got foreclosed [and some still paid triple-digit APRs on payday loans].”

15: risk

Chapter 15 is the most technical in terms of financial jargon. Here, Chancellor argues that low interest rates caused investors to take more riskier positions in search of yield. When money is cheap, as the book has argued so far, investors are motivated to borrow more than they normally would to tap into higher yields in the market. He blames low interest rates for the increasing use of low credit securities, namely junk bonds and leveraged loans, which were attractive despite their riskiness because money was cheap. Another consequence of low interest rates Chancellor points to is that securities with longer durations became more attractive (inverted yield curve). Investors who flocked to longer duration securities were pursuing higher yields, but they were now risking losses should interest rates rise. Investors also poured their borrowed money into strategies that tapped into liquidity and even volatility spreads, and shadow banking (the systemic issue pre ‘08) re-emerged. Experts disagreed over the culpability of monetary and macroprudential (regulatory) policy in driving investors to such destabilizing investments. Chancellor argues that low rates begat low rates via this trap of financial fragility.

16: regulating intl. capital flows

Chapter 16 is about the absurdity of negative interest rates. After summarizing the trouble with low interest rates, Chancellor describes how almost all central banks in the Western world eventually accumulated securities (lent enough money through quantitative easing) that exceeded their national GDPs. They continued to pursue drastic monetary measures such as ‘qualitative’ and ‘credit easing’ that culminated in setting interest rates below zero. The chapter gets its title “rusting money” from a German-born businessman name Silvio Gesell who had one more idea to spur economic activity. If money was allowed to go bad like a fruit or rust like metal, then hoarding would be disincentivized. Negative interest rates would have the same effect. Homeowners received rebates on their mortgages, but investment was not spurred. Several fund managers and retired central bankers criticized the policy, and Chancellor calls it “possibly the stupidest… innovation in the history of finance.”

Part 3 The Game of Marbles

So much for part 2. In part 3, Chancellor addresses current affairs such as Turkish president Erdogan’s hot take on usury (Erdogan calls it “the mother and father of all evil”) and he provides an overview of Chinese growth in so far as it has been marked by large debts.

In chapter 17, Chancellor lays out the influence that American monetary policy wields over other economies. With the dollar serving as the world’s reserve currency and the currency in which most international trade is denominated [albeit decreasingly so], easy money in America unleashes a “global monetary plague” as author Brendan Brown puts it. Chancellor points to two phases of global liquidity in which international capital had financed credit booms and real estate bubbles: the first was on the edges of Europe before ’08 (like in Spain) and the second was in emerging markets after ’08 (like in Turkey). Rapid capital inflows in emerging markets combined with a weak dollar caused other currencies to appreciate against the dollar. Thus foreign central banks moved to buy dollars and keep their currencies cheap (to keep their exports competitive internationally). These dollar purchases in turn begot lower US interest rates. Chancellor claims that easy dollars underpinned international scandals including the bankruptcy of Brazilian oil conglomerate OGX and Malaysian development fund 1MDB. In Turkey, the cheap inflows funded a construction boom and led Erdogan’s “misdirected… invective… [against] the curse of interest rates.” Thus, America’s low interest rates begot international conditions that now make it hard to raise them without consequences.

Most of Chapter 18 reads like a laundry list of events since China’s 1970s reforms. It’s tedious to read and seems as though it went through at most two rounds of edits. In it, Chancellor argues that “financial deepening [accumulating financial assets faster than non-financial wealth] made the China miracle, and financial repression [the state control of interest rates] threatened to undo it.” China’s economy was described by former Premier Wen Jiabao as “unstable, unbalanced, uncoordinated, and unsustainable.” Chancellor shows why each item in Jiabao's list is true. Speculative fevers were common in the low interest setting, especially in real estate. Thus bubbles made the economy unstable. Premier Li Keqiang stated that the knife must be brought down on “zombie enterprises with absolute overcapacity” thus confirming that investment was uncoordinated. Furthermore, since these investments were largely in real estate and hence not as productive as possible, debt surged and stayed high and was therefore unsustainable. The rise of shadow banks, subsequent execution of Ponzi scheme operators, and debt forgiveness by the state, Chancellor says, pointed to an unbalanced economy. Eventually, the capital controls that made money easy failed to keep money inside China as people smuggled cash overseas. Chancellor cites several anecdotes that point to incidents of rent extraction by politically connected Chinese citizens and thus argues that inequality also became an issue.

Conclusion and Postscript

To wrap up, Chancellor points to financial repression in its western outfit. Though Western observers tend to criticize China for its overbearing state apparatus, monetary policy in Western nations has taken society far down what Friedrich Hayek foresaw as the road to serfdom by manipulating the most important price of all, “the universal price… at the heart of capitalism.” With government finances now increasingly vulnerable to small rises in interest rates, “the political imperative to maintain financial repression was overwhelming.” As Hayek pointed out, “once the free market is impeded beyond a certain degree, the planner will be forced to extend his controls until they become all comprehensive.”

Chancellor’s postscript is most urgent. It addresses the market turbulence induced by the emergence of COVID-19 and the fiscal and monetary measures taken to alleviate its hardships. Modern Monetary Theory, though it was not supported by any theory, seemed to guide the practitioners. Flush with cash and emergency loans, the Western world witnessed the rise of SPACs, the onslaught of the WallStreetBets mob, and the craze around NFTs and cryptocurrencies. Chancellor closes by recalling his point that the price index does not necessarily indicate where interest rates are relative to the true or natural rate and by suggesting one way forward: as proposed by former Deutsche Bank chief economist Thomas Mayer, a digital gold standard whose monetary supply is to be pegged to the growth rate would be neither manipulable nor disconnected from the laws of supply and demand.