I have just finished reading the book, " The Price of Time: The Real Story of Interest," Kindle Edition, by Edward Chancellor.
My Kindle says that I have read 300 pages which is 54% of the book. The rest of the book is reference material.
Mr. Chancellor thanks many people, but his intellectual mentors are Jim Grant (of Grant’s Interest Rate Observer which requires a paid subscription), Doug Noland (who has written the Credit Bubble Bulletin for many years) and Claudio Borio, Head of the Monetary and Economic Department of the Bank for International Settlements (BIS, often called "the central bankers’ central bank). He is a member of the Bank’s Executive Committee.
The Credit Bubble Bulletin scares my socks off every time I read it. Credit has been in a bubble since 2001, when Fed Chair Alan Greenspan dropped the Fed funds rate and held it low for years after the mild 2001 recession (associated with the dot-com stock market bubble bust). The markets became addicted to low interest rates and the Fed dropped the real fed funds rate below zero after 2008 and 2020.
From the book’s summary:
" Interest is a necessary reward for lenders to part with their capital. Interest performs many vital functions: it encourages people to save; enables them to place a value on precious assets, such as houses and all manner of financial securities; and allows us to price risk.
All economic and financial activities take place across time. Interest is often described as the “price of money,” but it is better called the “price of time:” Time is scarce, time has value, interest is the time value of money."
In a capitalist society (or a Communist society practicing production and capital investments) the most important price of any commodity is the price of money.
Whenever the price of money is artificially controlled, it will be misallocated. Keeping the real yield of interest negative cheats savers and enables speculators in non-productive investments.
The Price of Time is the ultimate Macroeconomic variable.
All asset markets have been inflated by the yield suppression of central banks around the world. Not only the U.S., Japan and Europe. China’s misallocation of capital and enormous debts are absolutely breathtaking.
Low interest rates have caused a lot of harm. The Wall Street Journal, which one would expect to applaud low rates and the asset bubble, was damning with faint praise.
Ben Bernanke Wins a Nobel, in Theory
The former Federal Reserve Chairman’s research about financial crises didn’t help prevent one in 2008.
By The Wall Street Journal Editorial Board, Oct. 10, 2022
…
Ben Bernanke Wins a Nobel, in Theory
The former Federal Reserve Chairman’s research about financial crises didn’t help prevent one in 2008. …
Mr. Bernanke observed that when a bank fails, its institutional insight into the creditworthiness of its borrowers is lost and is hard to replace. This, Mr. Bernanke posited, was a major reason the Great Depression became as deep as it did.
This research is important and could be useful to central bankers, except it didn’t help Mr. Bernanke when he was at the Federal Reserve in the 2000s and 2010s. It may have done the opposite. We’d argue now, as we argued at the time, that Mr. Bernanke and the Fed created the monetary conditions that led to the worst financial panic in 80 years…
Suppressing interest rates to historic lows and flooding the economy with bank reserves via quantitative easing distorted markets for every form of credit in ways economists still don’t understand — and then the Fed did the same only more so when the pandemic hit in 2020. The long-term effects on financial stability are only now coming into view as Chairman Jerome Powell’s Fed fights the inflation it helped to ignite…[end quote]
The Fed’s raising of interest rates in 2022 has already begun to deflate bloated asset values around the world as the bubbles begin to burst. This process has only just begun. It’s less than a year in progress.
The Federal Reserve is already under intense scrutiny and pressure to back away from its program of raising the fed funds rate to neutral and past neutral to a restrictive rate that will slow inflation. This process will take months and perhaps longer since there’s no saying when inflation will begin to subside significantly.
Barring a genuine financial crisis (not a routine recession and/ or stock market hissy fit) the Fed will not back away from their program as long as inflation remains high. Powell fully understands the danger of backing away before inflation is really controlled. He wants to be Volcker, not Arthur Burns. He is willing to inflict pain and ignore whining and screaming.
As investors, we need to be aware that the negative real fed funds rate that inflated the bubbles may not return. Our asset values may not return to their 2020 highs for many years, if ever.
Yes, it’s happened before.
Wendy
