The Price of Time

Key Takeaways

1. This book is about the role of interest in a modern economy. It was inspired by a Bastiat-like conviction that ultra-low interest rates were contributing to many of our current woes, whether the collapse of productivity growth, unaffordable housing, rising inequality, the loss of market competition or financial fragility. Ultra-low rates also seemed to play some role in the resurgence of populism as Sumner’s Forgotten Man started to lose patience.
2. The most important question addressed in this book is whether a capitalist economy can function properly without market-determined interest.
3. The argument of this book is that interest is required to direct the allocation of capital, and that without interest it becomes impossible to value investments.
4. connection between nature’s productivity and interest was suggested by nineteenth-century German economist Karl Arnd, who claimed that the interest rate was regulated by ‘the proportion, in which the timber in European forests is augmented through their annual growth … at the rate of 3 or 4 to 100. As a result interest in these countries cannot fall below that rate.
5. Böhm-Bawerk declared that the cultural level of a nation is mirrored by its rate of interest. In the ancient world, interest rates charted the course of great civilizations. In Babylon, Greece and Rome interest rates followed a U-shaped curve over the centuries; declining as each civilization became established and prospered, and rising sharply during periods of decline and fall. Very low interest rates appear to have been the calm before the storm.
6. Anthropologists no longer accept that money originated to replace barter, as classical economists, including Smith, had maintained. There is no evidence for this barter-to-money myth. On the contrary, it seems likely that credit antedated money and that the earliest forms of credit bore interest.
7. For Turgot, the world of finance was a mirror held up to the world, with real and financial assets exchangeable for each other. Since land, buildings and factories produce income, so money must yield interest. This important insight is too often overlooked by modern economists.
8. Interest exists because loans are productive, and even when not productive still have value. It exists because those in possession of capital need to be induced to lend, and because lending is a risky business. It exists because production takes place over time and human beings are naturally impatient.
9. Interest, he said, is the price of time. There is no better definition.
10. Yet our modern monetary mandarins never stop to consider Bagehot’s warnings about the adverse consequences of easy money – how interest rates set at 2 per cent or less fuel speculative manias, drive savers to make risky investments, encourage bad lending and weaken the financial system. One wonders whether any of them has actually opened the pages of Lombard Street and encountered its ruminations on John Bull and his wild investment proclivities.
11. There is nothing so unstable as a stabilized price level. James Grant, 2014
12. ‘This is not a question of trade-offs. We cannot shy away from implementing a policy that ensures price stability on account of potential collateral effects.’53 The ECB would pursue its target, let the consequences be damned.
13. ‘Paradoxical as it may seem, the riches of nations can be measured by the violence of the crises which they experience,’ opined the nineteenth-century French economist Clément Juglar. Once creative destruction is taken into account, Juglar’s observation doesn’t appear so puzzling.
14. But economic volatility, as Clément Juglar observed long ago, is a source of vitality.
15. Drawing a parallel between the US Forest Service and Federal Reserve is irresistible. The Fed was created less than a decade after its environmental counterpart. By the 1920s the Fed was attempting to suppress the business cycle. While ‘federal fire suppression acts to subsidize developments of private lands in fire-prone areas’, the Fed’s policy of suppressing economic volatility encouraged the build-up of financial leverage. Both the Forest Service and Federal Reserve focused their attention on immediate problems – fires and panics – while ignoring the longer-term consequences of their actions.
16. In 2015, the Bank for International Settlements warned that finance was crowding out the real economy. More bank loans went to sectors with plenty of collateral, such as real estate, which generated little by way of efficiency improvements. Manufacturing and businesses that required lots of R&D were starved of credit. Beyond a certain point, the BIS concluded, ‘the growth of a country’s financial system is a drag on productivity growth. That is, higher growth in the financial sector reduces real growth.
17. Interest is the wage of abstinence
18. Economists talk about time preference rather than impatience to describe how people value present and future goods differently. An individual’s time preference can be seen as a kind of personal rate of interest.
19. As we have argued, it is interest that connects the present and the future; with interest rates set by central banks at the lowest level in history that link was effectively broken.

What I got out of it

1. A worthwhile deep dive into interest rates, it’s history, some common cycles, how it permeates our financial world, and more. Long read, but worth it