The Price of Time: The Real Story of Interest
title confirmed on edwardchancellor.com
Summary
Chancellor argues that interest is the price of time, that it performs several distinct economic functions, and that pushing it to zero or below after 2008 damaged each of them. He traces the history of interest from Mesopotamian lending through the usury debates, the Dutch and British markets, Bagehot and Wicksell, to the post-crisis period.
The functional argument is the analytical spine. He identifies interest as the reward for saving, the price that allocates capital between competing uses, the mechanism that values assets by discounting future cash flows, the price of risk, and a constraint on leverage. He then argues that near-zero rates degraded each: savers were penalised and pension funds became insolvent on their liabilities, capital was allocated to projects that could not clear any normal hurdle, asset prices rose in a way that transferred wealth to existing owners and widened inequality, risk was systematically mispriced, companies used cheap debt for buybacks rather than investment, and firms that should have failed were kept alive, which lowered aggregate productivity growth.
He supports this with historical episodes where low rates preceded speculative episodes, from John Law through the 1920s to the present.
The book is well written and the historical material is strong. It is also a sustained argument for a position, and Chancellor does not engage seriously with the counter-case that rates were low because of a global savings glut and weak demand rather than because central banks chose it. Readers should note the causality question is exactly what is at issue and the book largely assumes its answer.
Key takeaways 7
- Interest performs several distinct functions, including rewarding saving, allocating capital, valuing assets, pricing risk and constraining leverage, and suppressing it damages each.
- Near-zero rates allocated capital to projects that could not clear any normal hurdle, which lowered aggregate productivity growth.
- Low rates raised asset prices and thereby transferred wealth to existing asset owners, which is a mechanical consequence rather than a side effect.
- Cheap debt was used predominantly for share repurchases and financial engineering rather than for productive investment.
- Keeping insolvent firms alive through low borrowing costs prevents the reallocation of labour and capital that raises productivity.
- Pension funds and insurers became structurally unable to meet liabilities that had been calculated on historically normal discount rates.
- Historical episodes of unusually low interest rates have consistently preceded speculative manias, from John Law's scheme onward.
Who should read it
Investors who want the case that low rates cause misallocation, with the counter-argument about savings gluts sought elsewhere.
About Edward Chancellor
Financial historian and investment strategist; formerly Lazard Brothers, GMO and Breakingviews; columnist, Reuters Breakingviews
Devil Take the Hindmost remains the standard history of speculative bubbles, and The Price of Time did the same job for interest rates.
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