Our second visit with market/business/econ historian Edward Chancellor in ten days. Link below.
From TheMarket.ch at Neue Zürcher Zeitung, July 21:
Historian and author Edward Chancellor in an in-depth interview about the failed monetary policy of central banks and the difficult path to a healthier and more robust economic and financial system.
Edward Chancellor takes a hard line with the central bankers of our time. In his new book «The Price of Time: The Real Story of Interest», the economic historian shows that throughout the history of mankind, speculative bubbles and ugly consequences have always occurred when interest rates were kept too low for too long.
«After years of ultra-low interest rates, central banks created a bubble in pretty much every asset class, they facilitated a misallocation of capital of epic proportions, they allowed an over-financialization of the economy and a rise in indebtedness», he says.
In an in-depth conversation with The Market NZZ, which has been lightly edited for clarity, Mr. Chancellor explains why a narrow 2% inflation target was dangerous, why parallels with the 1970s are only partially valid, what the coming years could look like in financial markets – and why one has to look to Basel to find heroes.
In your book, you show that whenever interest rates are too low for too long, there are ugly consequences. In the past years we have had the lowest interest rates in human history. What lies ahead?
The aim of my book is to try to understand what interest does and the effect it has on both financial markets and on the real economy. I trace the history of interest rates back five millennia, to show how it is the oldest economic institution in the history of man, and it’s extraordinarily unlikely that we would have had such an institution had it not been a very essential feature of human life. Interest is the price of time. Time is valuable, or as Ben Franklin would say, time is money. And if you don’t place a proper price on time, then the world will turn upside down.
Is that what happened recently? The world turned upside down?
The interest rate environment of the past years has created an enormous bubble in pretty much every asset class. That’s what I see as the ultimate cause of the «Everything Bubble». During the Covid market mania of 2020 and 2021, the Everything Bubble was evidenced in the overall valuation of the US stock market, extremes of tech companies, unlisted unicorns, in meme stocks like Gamestop, speculative frenzies around cryptocurrencies, baseball cards, vintage cars, art, everything seemed to get caught up in this bubble. The question is why was it happening?
Why was it?
There’s always the idea that speculative bubbles are formed around the invention of a new technology. Think of the Dotcom Bubble of the late Nineties. Probably the first recorded tech bubble took place in London during the 1690s, when English speculators got very excited about diving bells that were being used to salvage treasure from sunken ships. But what is interesting about the 1690s is that it was also a period of monetary disorder and low interest rates. What I’m doing in my book is leaving aside the tech aspects and the psychological aspects of bubbles, and concentrating solely on the monetary underpinnings. What I argue is that when interest rates are pushed down too low, people are driven into speculative endeavours and chase returns. One way of explaining this is that in investment, we need a discount rate in order to discount future cash streams back to a current value. It’s the first thing we learn in finance. So it’s not surprising that you should have the most speculative ventures rising to very high valuations when the discount rate is very low.
The era of ultra-low interest rates started in the aftermath of the Global Financial Crisis, when central banks opened the monetary spigots. In the years that followed, they argued that the economy was constantly on the brink of deflation. Was that a mistake?
Yes. This concern about a falling price level was profoundly misjudged. The Bank for International Settlements put out an interesting paper a few years ago, where they looked at historic incidences of deflation and they found there was no real correlation between periods of deflation and economic growth or financial crises. They found that the Great Depression of the 1930s, where high deflation indeed coincided with a deep recession, was a standalone case. We should not necessarily generalize from that experience.
You call for a distinction between good and bad deflation?
Yes, I distinguish between good deflation which comes from productivity growth, and bad deflation that comes from a collapse in the credit and banking systems. The good form of deflation actually benefits the working people, because things get cheaper. Your computer, your next car are a bit cheaper than last year. Technological improvements bring down the price: What’s not to like?....
....MUCH MORE
The chart is interactive (mouse-over) but even just eyeballing it, it looks like Q1 2022 down -7.3% is the biggest fall in productivity in 75 years.
Someone should alert the media.
Recently on Mr. Chancellor:Interest Rates: William J. Bernstein Reviews Edward Chancellor's "The Price of Time"
