Interest rates are at the front of everyone’s mind at the moment, so The Price of Time is a timely and thought-provoking read.
It begins with a history of interest, from the ancient Mesopotamians through the 18th century Mississippi Bubble and the Wall Street Crash, up to the present day with the aftermath of the 2008 financial crisis, tech bubbles and cryptocurrency. Chancellor considers perspectives on interest throughout history. Is it the reward for delayed gratification (hence the title of the book), a premium on risk or an unjustified rent taken from those who need credit by those who have assets to spare? Is there, a ‘natural’ rate of interest, and if so, how can we know what it is?
The second part of the book focuses on the aftermath of the 2008 banking crash, after which the Federal Reserve led central banks across the world in cutting interest rates near to – or even below – zero. Central to Chancellor’s argument is that, while we might intuitively think that low interest rates are a good thing for individuals and economies – most people and businesses have to borrow at some point, and the poorer you are, the more likely you are to have to – in fact, sustained low interest rates are damaging.
Low interest rates have inflated the price of assets. Businesses are able to borrow cheaply to fund predatory takeovers and share buybacks that benefit executives on share priced-linked bonus schemes. Individuals who already have assets can borrow cheaply to buy more, while those with nothing are locked out by ever-rising prices (think buy-to-let landlords versus tenants). Savers watch the value of what they have disappear. This leads people to take ever greater risks with what savings they have or, worse, borrow to invest in volatile assets or cryptocurrencies.
While much of the focus is on Britain and America, The Price of Time also has chapters on China and Japan and the way that smaller, low-income countries have largely followed the model of the Federal Bank in cutting interest rates – because the power of the US dollar means they feel they have no choice. There is also a scary section on negative interest rates which have been trialled in some European countries.
Chancellor’s isn’t a simple left-right argument. Free marketeers could argue that central banks intervening to impose artificially low interest rates distort the market. They encourage poor business decisions and resource allocation, because there is no real penalty for getting it wrong. From the left you can see how cheap money for those who are already asset-rich promotes asset bubbles, while locking out the poorest. The cheap credit which benefits banks and large businesses is often not available to consumers, who are often still paying high interest rates for credit cards and bank loans, while savers watch their money erode as interest rates fail to match inflation.
Is there an alternative? Chancellor cites Iceland’s very different response to the 2008 financial crisis. The Icelandic government took the decision to protect its people and let the banks fail, rather than the other way round as happened elsewhere. They did not cut interest rates. The worst offenders in the banking sector were jailed. He argues that Iceland’s economy has bounced back far better than other western economies.
The Price of Time offers a fascinating perspective just because it goes against the consensus. (I’ve tried to find a review from an economist critiquing it but it seems to have been largely ignored by the profession.) It’s also an accessible and even entertaining read for the general reader. That may not be much consolation for people who are already at their limit who are seeing interest rates go up, with no mitigations offered by the government.
I received a copy of The Price of Time from the publisher via Netgalley.
View The Price of Time on Goodreads