Book Review: The Price of Time


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Edward Chancellor

The Price of Time: Interest, Capitalism and the Curse of Easy Money. 2022. Edward Chancellor. Atlantic Monthly Press.

Few areas of macroeconomic policy are as important and generate as much heat as monetary policy.

Were a first-year economics student to learn about the subject, I would tell them to start with the wonderfully entertaining video titled “Fear the Boom and Bust: Keynes’ Original Battle Against Hayek Rap.“I would then give the student a copy of Edward Chancellorit is The price of time.

It’s no secret that productivity growth is slowing around the world; for example, in the United States, it fell from 2.8% per year between 1947 and 1973 to 1.2% after 2010. It is worse in Europe and Japan, where productivity is growing by less than 1% per year for a generation.

Even more famously, Robert Gordon of Northwestern University mainly blames the slowing pace of technological innovation. Professor Gordon and I need to be exposed to different versions of the scientific literature which, in my view, is full of evidence of technological progress. An unsexy, banal, but nevertheless capital example: the Bosch-Haber process provides most of the world’s fertilizers. This high-temperature chemical reaction consumes huge amounts of fossil fuel, but the past decade has seen tremendous advances in low-temperature catalysis that promise to both increase agricultural productivity and reduce greenhouse gas emissions. greenhouse effect.

Larry Summers (and before him, Alvin Hansen), however, blames “secular stagnation”, which attributes falling productivity to an aging and therefore less vigorous and intellectually agile workforce. The problem with this explanation is that it doesn’t fit the demographics. Anecdotally, for example, the Roaring Twenties followed a long period of slow population growth, and more systemic data show no relationship between population growth and the economic variety of growth.

Chancellor provides a different, more compelling, and scarier explanation for the slowdown in global economies: the now decades-long central bank love affair with artificially low interest rates.

It begins by discussing Swedish economist Knut Wicksell’s concept of the natural rate of interest, r* (r-star), below which inflation occurs and above which deflation occurs. While a skeptic might point out that r* is unobservable, it has been eminently clear for two decades that we are in a monetary situation Terra Nova with prevailing rates well below r*.

Chancellor’s central thesis, supported by extensive academic research, in particular by Claudi Borio of the Bank for International Settlements, is that interest rates below r* promote a number of macroeconomic ills. Call them the “four horsemen of cheap money”.

The first jumper is the bad investment. Rates below r* push capital toward projects with expected returns that are lower than normal; in other words, cheap money lowers the natural “hurdle rate” of the investment. Think of the billions in investor money who taught an entire generation of millennials that a drive across town should cost around $10 or, more generally, the overinvestment in real estate, one of the least productive sectors. economy.

The second issue is soaring asset prices. Again, think in particular of the corrosive societal effects of unaffordable housing or, more generally, of the growing concentration of financial assets in the upper percentiles of wealth, whose relatively low marginal propensity to consume further depresses economic growth. After all, if you direct income to the poor, they will only waste it on food and housing.

The third issue, the financialization of developed world economies, is perhaps the most insidious of all. Chancellor points out that in 2008 in the United States, “the output of the finance, insurance and real estate (FIRE) sectors increased by 50% compared to the manufacturing industry. The country had more [real estate] agents than farmers.

This financialization has pushed companies into taking on cheap debt, with disastrous unintended consequences. Chief among these were takeovers which starved ongoing operations, capital investment and R&D. Additionally, debt-fueled acquisitions increase industry concentration, which, in turn, depreciates consumers. Moreover, the natural response to cheap debt is to take on more of it, thus guaranteeing a possible conflagration.

The fourth workhorse of cheap money is the “zombification” of companies which, in a normal interest rate environment, would have gone bankrupt. One of the most enjoyable and uplifting sections of the book compares properly functioning Schumpeterian creative destruction with a healthy forest. When forests are left to their own devices, fires cut down the least healthy trees and allow resilient saplings, whose growth would otherwise be stunted by larger but diseased trees, to flourish. For many decades, the U.S. Forest Service aggressively fought the fires, only to find that it ultimately resulted in giant conflagrations in acreages allowed to become ecologically senile. The Chancellor convincingly demonstrates that something similar has happened with monetary policy and that much of the blame for today’s low-productivity global economy can be laid at the feet of the overgrown forest of unhealthy zombie businesses kept alive by a low-interest survival system.

Perhaps the book’s most profound observation about low interest rates is that while their salutary effects on asset prices are clearly visible, the new rich are much slower to perceive that the same thing has happened to the present value of their liabilities. Another exciting observation: low tariffs, by allowing manufacturers to push the production process further into the future, promote the extension of global supply chains that can encompass multiple intercontinental journeys. If and when rates rise, globalization will necessarily go in the opposite direction.

Chancellor, who well understands that Schumpeterian creative destruction requires a vigorous welfare system, is not an out-of-control libertarian. He approvingly cites Tyler Cowen’s observation that “over the past few decades we have conducted a large-scale social experiment with ultra-low savings rates, without a strong safety net under the law of high-flying “.

Chancellor follows Cowen’s observation with that of Michael Burry, loved in Michael Lewis The big court: “The zero interest rate policy has broken the social contract for generations of hard-working Americans who have saved for retirement, only to find that their savings are not enough.”

The Chancellor himself observes that “an increasing number of Americans have been forced to work beyond the traditional retirement age”. For young workers, the dream of enjoying a comfortable old age would remain a dream – another illusion of wealth “the eggs are running out.”

One of the joys of this book is its relevance to both political politics and personal finance, and if I had any fault with Chancellor’s wonderful volume it would be for not exploring these areas further. He devotes only a few paragraphs, for example, to the obvious relationship between the increase in inequality due to financialization and the global rise of authoritarian populism. In the words of one observer, “the pitchforks are coming”.

The Chancellor could also have spent more ink discussing who the demographic winners and losers are in a financial landscape of universal asset bloat. He only briefly touches on the fact that as long as their assets remain bloated, older retirees will be able to generously finance their consumption by selling them, while young savers will be unable to finance their golden years with low-yielding portfolios. Worse, pension systems, especially outside the United States, risk becoming trapped in a “Ilmanen Spiralin which they react to low expected returns with increased funding, which, in turn, pushes valuations even higher and lowers expected returns even further.

Perhaps the most serious omission from the book is its neglect of the absence of an American central bank between 1837 and 1914, a period that saw frequent and devastating financial crises. (Masterful by Charles P. Kindleberger and Robert Z. Alibe Manias, panics and accidentsfor example, lists 17 panics during the 19th century, but only 11 during the 20th).

The aforementioned omissions are tiny quibbles; Chancellor’s encyclopedic understanding of economic history shines through on nearly every page, sometimes with playful whimsy. Why, for example, does it tell the story of an obscure early 20th-century gadfly named Silvio Gesell, who, in order to increase Depression-era spending, came up with a new currency that required a stamp every week and reduce its value by 5%? So that a few pages later he could relate it to Kenneth Rogoff’s seriously taken proposal to ban cash in order to allow central banks to accomplish the same thing.

As well as being a first-rate economic historian, Chancellor is also a master of words; almost unique among serious finance books, The price of time works well for bedtime reading. The book is full of amusing anecdotes, such as Bagehot’s mention of a “corporation for navigation around 1800”. [ice] skates to the Torrid Zone” and pensioner Paul Volcker blowing his nose loudly in disapproval as Janet Yellen explained his support for low rates. that “one could say (with more or less a straight face) that investors should buy negative yielding bonds for capital gains and stocks for income”.

Over 20 years ago, Edward Chancellor The devil takes the last word provided readers with one of the most engaging and incisive descriptions of financial manias ever written. It was a tough act to follow, but The price of time fills the bill well; it is a serious work of political economy that is part comprehensive guide to the greatest peril of the global financial system and part literary chocolate pie.

Disclaimer: Please note that the content of this site should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of CFA Institute.

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