Bankless - 171 - What Causes Bubbles? with Edward Chancellor - "The Price of Time"

Starting point is 00:00:00 Time is money. Once you realize that time has value, then it should start becoming immediately clear that taking interest rates, the price of time, down to zero, is highly unnatural. It would be like depriving an animal of oxygen. And taking them to negative becomes almost insane. Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. We're living in this era of central banker capitalism.

Starting point is 00:00:44 We have low interest rates, everything bubbles. Is this new for humanity? What does history tell us might happen next? Today, we have financial historian Edward Chancellor, who's going to help us answer these questions. And along the way, we learn timeless lessons about interest, debt, and a time-bushed. value of money, a few takeaways for you, Bankless Nation. Number one, we talk about what causes bubbles. Is it low interest rates or the madness of crowds? We've certainly seen a lot of both in our crypto journey. Number two, can we get away from bubbles? Are they just part of our DNA?

Starting point is 00:01:15 Number three, what happens when that natural rate of interest becomes unnatural? Number four, after decades of studying the history of money and finance, who does Edward think is right? The Keynesians or the Austrians? Number five, what does Edward Chancellor think of How do they relate to central bank digital currencies? Really spicy takes near the end. And number six, what happens next? That's what we're all trying to figure out, David. What's the significance of this episode? What should folks get out of this? For bankless listeners that have been paying attention, I've brought up this book, Devil Take the Hindmost, throughout a handful of bankless podcasts. Edward Chancellor is the author of Devil Take the Hindmost. So one of my favorite books about money and finance that I think teaches us really important lessons. And he's also written a more recent book called The Price of Time, which is a study of interest rates. I really think these two books are Yin and Yang. They're two sides of the same coin. And today on Bankless, where we talk about the frontier of money and finance, we're actually

Starting point is 00:02:14 talking about the history of money and finance up to this point. And I think really why this episode is so significant and why Edward as a financial historian is so significant is that it's about money, it's about finance, but it's also about humans. It's also about the intracycic layer of what makes these things happen. Because again, money, it's just a story that we tell ourselves. Finance exists in the minds of humans. And so Edward does a great job just running through history and watching humans try to contend with these things that we've created, these naturally emergent phenomenon like interest rates and financial bubbles. And so I think without a complete picture of understanding money and finance that goes down into the human level,

Starting point is 00:02:59 the sociological level, it's actually an incomplete story. I think Edward can probably give us, I think he gave us the most comprehensive, unabridged articulation of the progress of money in finance because he adds in that social layer. And when we get to the end and we ask him about his current opinions in the modern day state of things, state of affairs, including this new player in the game, crypto, he is an older historian. He's seen some decades, but he really resonates with the crypto story. And I thought that that was particularly interesting. It's very cool. He resonates particularly with this idea of money as freedom technology, which is when we get it right, that it can bring freedom to the world. And that's certainly something that the crypto story

Starting point is 00:03:42 resonates with. Also, David, he's just a delight to listen to. You mentioned he's from an older generation, a generation that uses words like skull duggery and knaves. So just an absolute delight to and talk with. And as usual, all bankless citizens have access to the debrief episode, which is the episode that Dave and I are about to record, record it after this episode. David, I'm really excited to get into this topic with you. I know you are a huge, you're a super fan of these books, and there's so much that Edward unlocked that I want to talk to you more about. Of course, you can become a citizen. If you click the link in your show notes and access the premium RSS feed, will you get access to that debrief episode and all of our special bonus content that we only put out on the premium feed.

Starting point is 00:04:24 Guys, we're going to get right to our episode with Edward. But before we do, we want to thank the sponsor who made this possible, including our number one recommended crypto exchange, Cracken. Go check them out. Cracken has been a leader in the crypto industry for the last 12 years. Dedicated to accelerating the global adoption of crypto, Cracken puts an emphasis on security, transparency, and client support, which is why over 9 million clients have come to love Cracken's products. Whether you're a beginner or a pro, the Cracken U.S. is simple, intuitive, and frictionless,

Starting point is 00:04:53 making the Cracken app a great place for all to get involved and learn about crypto. For those with experience, the redesigned Cracken Pro app and web experience is completely customizable to your trading needs, integrating key trading features into one seamless interface. Cracken has a 24-7-365 client support team that is globally recognized. Cracken support is available wherever, whenever you need them by phone, chat, or email. And for all of you NFTers out there, the brand-new Cracken NFT beta platform gives you the best NFT trading experience possible. Rarity rankings, no gas fees, and the ability to buy an NFT-T-Eater. straight with cash. Does your crypto exchange prioritize its customers the way that Cracken does? And if not, sign up with Cracken at Cracken.com slash bankless. Hey, Bankless Nation. If you're listening to this,

Starting point is 00:05:38 it's because you're on the free Bankless RSS feed. Did you know that there's an ad-free version of bankless that comes with the bankless premium subscription? No ads, just straight to the content. But that's just one of many things that a premium subscription gets you. There's also the token report, a monthly bullish, bearish, neutral report on the hottest tokens of the month. And the regular updates from the token report go into the token Bible, your first stop shop for every token worth investigating in crypto. Bankless premium also gets you a 30% discount to the permissionless conference, which means it basically just pays for itself. There's also the AirDrop Guide to make sure you don't miss a drop in 2023. But really, the best part about bankless premium is hanging out with me, Ryan, and the rest of

Starting point is 00:06:19 the bankless team in the inner circle Discord only for premium members. Want the alpha? Check out Ben the analyst's Digen pit, where you can ask him questions about the token. report. Got a question? I've got my own Q&A room for any questions that you might have. At Bankless, we have huge things planned for 2023, including a new website with login with your Ethereum address capabilities, and we're super excited to ship what we are calling Bankless 2.0 Soon TM. So if you want extra help exploring the frontier, subscribe to Bankless Premium. It's under 50 cents a day and provides a wealth of knowledge and support on your journey West. I'll see you in the Discord. If you haven't experienced the superpowers that a smart contract

Starting point is 00:06:56 wallet gives you, check out Ambuyer. Ambire works with all the EVM chains that are out there. The layer two is like Arbitrum, optimism, and Polygon, but also the non-Etherium chains like Avalanche and Phantom. Because of the power of smart contract wallets, Ambire lets you pay for gas and stable coins, meaning you'll never have to spend your precious ETH again. The web app has numerous fiat on-rams to make it easy to dump your fiat for crypto. And if you like self-custody, but you still want training rules, you can recover a lost

Starting point is 00:07:22 and buyer wallet using an email and password, but without giving the Ambier team any control. over your funds. Check it out at ambire.com for the web app experience. But also, the Ambire mobile wallet is coming soon for both iOS and Android. And if you want to be a beta tester, you can sign up at ambire.com slash app. And since you stayed to the very end of this ad read, you should know that Ambire is air dropping its wallet token to early users for simply just using the wallet. So if you want to get started with Ambire, all the links that you need are in the show notes. Bankless Nation, I would love to introduce you to Edward Chancellor. He is a financial historian, and an author of two of my favorite books, linking together the history of money and finance

Starting point is 00:08:00 and human culture. The first book, Devil Take the Hindmost, a history of financial speculation. I've brought up a handful of times across other podcast episodes, and this one explores the history of financial bubbles in their underlying causes. In Edward's newest book, The Price of Time, The Real Story of Interest, is a similar book in which it explores the story of interest from its roots to the modern day and how our relationship with interest has developed. So today, on this episode we are going to explore in which the ways of money and finance is embedded deeper into our lives than we have previously thought. Edward, welcome to Bankless. Pleased to be with you. Edward, these two books, Price of Time, Devil Take the Hindmost. They focus on different things,

Starting point is 00:08:41 but I want to start and open up this conversation about where they actually overlap. One is about financial bubbles, the other is the story of interest rates. But if these were two Venn diagrams, how would you define the overlap between these two things? What do these two books have in common? Well, the overlap is most clearly in the area of financial speculation and bubbles. The first book, Devil Take the Highmist, deals where they look at a variety of different bubbles over time and examines them in different ways, what generates the bubble. For instance, you might get new technologies, or you might, I mean, technology is the most obvious example, but there are other types of bubbles you get real estate bubbles and so forth. And that was written in the 1990s when the

Starting point is 00:09:28 tech bubble, the dot-com bubble was beginning to take off. The second book is exclusively about interest and the role that interest plays and what happens when interest rates in particular fall to very low levels. That also has a lot of discussion of speculative bubbles historically and up to the recent day. And what I argue in the second book is that you could focus on speculative bubbles from an academic perspective in the last 20-odd years has been on behavioral finance, with people going crazy, what you call the madness of crowds. What I'm trying to draw attention to in the new book is how very low interest rates

Starting point is 00:10:12 are a main cause of speculative bubbles. So I don't have any discussion really of behavioral finance or of irrational exuberance in the new book. I simply go back and look at some of the same cases I do in the first book, such as the tulip mania in Holland of the 1630s. And what I hadn't realized when I wrote the first book is that actually in Holland in the 1630s was the period of falling interest rates and of a massive increase in the Dutch money supply created by the Dutch had a central bank

Starting point is 00:10:50 who's at the time called the Viesel Bank, which was founded at the beginning of the 17th century. And the Viesel Bank actually issued paper notes backed by gold currency. So in principle it couldn't create credit, but its notes were so popular that foreigners brought their money to Holland. So you saw an increase in the paper supply of money and falling interest rates. And that coincided with this speculative bubble, the first great speculative bubble in tulips. And then I look at a series of other bubbles in the second book, most notably, as you know, and in most detail,

Starting point is 00:11:26 the bubble created by John Law, the Scottish adventurer who founded the Mississippi Company in France in the 1710s. and who also established the first French central bank that issued a pure paperback currency and lowered interest rates. We can talk about that a bit later. And then the discussion of speculative bubbles and interest rates in the second book goes right up to what we've been living through in recent years, the so-called everything bubble, which, as Charlie Munger, the Warren Buffett's partner said back in 2020 was the most extraordinary episode in the history of finance. And I've read quite a lot of the history of finance over the years, and I'm inclined to agree with Munga. We're definitely going to zero into that part of the conversation

Starting point is 00:12:19 towards the end of this podcast. But first I want to articulate to you why these books are so meaningful to me and get your reflections on it. To me, both of these books are about like natural financial phenomena. Interest rates is like a naturally occurring phenomenon. And same thing with these financial bubbles. I think anyone who reads double takes the hindmost will immediately realize that humans will create financial bubbles when you leave them up to their own devices. And so your journey in writing these books has always been to explore like once upon a time humans created money and finance and the progression of money and finance has been like us trying to figure out what to do about that and slowly iterating towards the future by making

Starting point is 00:13:04 many mistakes along the way, but then inevitably do like making progress in the world of money and finance. That's my interpretation of these books. How would you reflect on that? I think that's a reasonable way of categorizing it. Are speculative bubbles inevitable? And the answer is probably yes. And I think in particular, say when you get a new technology whose outcome is uncertain and there's a need to try out different sort of business models that need to draw in a lot of capital to explore the new technology. And the new technology probably doesn't have the cash flow that you can latch upon to ascertain what its fundamental value will be. So I think what I say in the first book is that the speculative bubbles bring on the new technologies such as railroads in the

Starting point is 00:13:57 19th century or motor cars or radio in the in the 1920s and internet technology in the 1990s, early 2000s. But it doesn't tend to be a very good deal for the investors or speculators in the new technology. And it tends to, once the bubble has collapsed, tends to really result in a transfer of wealth from the speculators to the consumers who get the new services of the technology. at, if you will, a discounted price. And that book was published, Devitate the Highmost, published in 99.

Starting point is 00:14:34 And so the dot-com bubble, TMT bubble, as we call it, technology, media, and telecommunications bubble, hadn't quite come to an end. It had about sort of eight, nine months left to run. But we have quite a nice case that demonstrates the argument of the book. Because if you remember, there was massive investment in, fiber optic cables that were necessary to carry the new data for the internet data. And that was based on, at the time in the late 1990s, on forecasts for data traffic growth that

Starting point is 00:15:11 were massively exaggerated. And we had tremendous overinvestment in fiber optic cable. And shortly afterwards, there was then a slew of telecoms bankrupt. including the massive WorldCom bankruptcy, and we were left with 95% excess capacity in fiber-optic cable. And that really was, as I say, not a great deal for investors, but pretty good for people who were starting up tech firms and consumers of internet technology in the early 2000s. So you could say it's a misallocation of capital, but it also provides. the backbone for the new technology to take place. So there's a case in which, if you will, the bubble is serving a function, but just not serving the speculator's specific financial requirements.

Starting point is 00:16:09 As to the nature of interest, as you say, this is something that is natural to man, mankind. And I argue in the book, interest arises right at the dawn of history. We have records of interest being charged five millennia ago. And in fact, if you look into the ancient languages, you find that the word for interest in most of the ancient languages of the Near East was related to the offspring of livestock, of cattle, of sheep, and goats.

Starting point is 00:16:42 And what that suggests is that the early farmers in the sort of prehistoric periods were lending out their livestock and their grains and demanding an interest. payments. So the fact that interest is just so much older than even money is it telling you how fundamental it is to human activity. But we also, a great body of the study of interest has been around what economists call time preference. And time preference is the notion that human beings are naturally impatient. We are mortal and we preferable. And we preferable. And we preference. We are

Starting point is 00:17:24 to have things today rather than at some stage in the future. So the reason I call the book the price of time is because really what interest is is the difference in value between a dollar today and a dollar in a year's time. And you can see that in finance, we talk about that as discounting. And the sort of discounting of future pleasures is an inherently psychological phenomenon, seems to be, again, a natural phenomenon. So going into the details of the Price's Time, at the beginning, it tells a story at, like, the very beginning of interest, as in like humans discovering interest. Humans were skeptical. We called it usury, right? And the idea of it was closer to exploitation than it was alone.

Starting point is 00:18:16 So I'm wondering if you kind of illustrate why humans had this, like, distrusting relationship with interest in the early days. And as, our relationship with interest progressed, how we got over that obstacle? Well, we haven't really completely got over it. Well, that's funny because that's where my next question was. As I point out in the book, you get criticisms of lending and interest, for instance, in the Bible. The Greek philosophers such as Aristotle said that interest was illicit. He said that money was to be used in exchange, but not to gain through lending. And that,

Starting point is 00:18:54 Criticism then informed the sort of the early church period and then, you know, the medieval church through to, let's say, the early modern period, birth of capitalism. Why is such dislike of interest? I think it's partly legitimate. If you are in a traditional rural society and economy that has no economic growth, then the lending at interest, at high rates of interest, quickly takes people into a position of over-indebtedness, and in the ancient world, that could lead to people being taken into debt bondage and ultimately slavery. And in fact, there's some argument that lenders deliberately lent in order to enslave people through their high-interest loans. And then there's this problem of compound interest,

Starting point is 00:19:51 that of debts accruing at a high compound rate over a number of years. And that also, that's really what gets people into deep trouble. Compound interest over a long period is a phenomenon that's impossible to overcome. There is, I think, in the 18th century, someone, a British statistician calculated that if a gold sovereign had been lent at the time of, our lord and compounded at 2% a year or thereabouts. By the mid-18th century, the gold would have grown to two and a half globes the size of the earth. So you can see that you can't really compound loans at even a relatively small rate over a long period of time without the debt

Starting point is 00:20:40 becoming insufferable. So in the ancient world, they had these things called debt jubilees, which is the forgiveness of debt. Israelites, I think, had debt jubes every 50 year, The Greeks had occasional jubilees, the famous Athenian lawgiver Solon, actually came to power at a time when lenders had taken a lot of land through mortgages and he forgave the debts. And in Babylon, new rulers would forgive debts when they came to power. So the Jubilee is a, or the forgiveness of debts that have been compounding was a feature of the ancient world. but you still need interest. I mean, you may have it too high, but Aristotle had got it wrong. When he said that interest, you know, money is not to increase through loan,

Starting point is 00:21:35 he doesn't consider what I just mentioned before, the time dimension of the loan. It's quite clear that if I was to give you a dollar and ask for it immediately back, it would be exploitative and unjust to demand more than I. given. But I give you some of money and you give it back to me after a period of time and you use that loan to buy a house or engage in a business or whatever that is profitable to you. It's perfectly reasonable that I should demand some share of the profit. And in fact, without interest, there are same things you can't do. You can't fund businesses. For instance, in the ancient near East, voyages, merchants, voyages were funded with loans. The real estate market in

Starting point is 00:22:19 Mesopotamia was funded with loans. So you need the interest in order to provide quite basic functions. And I forgot to mention that, of course, in the ancient Near East, loans of grain were also used for agricultural purposes, just as farmers borrow today to farm. So you need it. And then eventually, by, let's say, the 16th century, capitalism has become so well established. in Europe, with merchants trading across Europe and using credit instruments that embed a rate of interest, that it becomes really futile to continue with these religious strictures against interest. And at the time of the Reformation in the early 16th century, there is a shift in the religious attitude towards usury. Martin Luther actually,

Starting point is 00:23:19 was rather old-fashioned in respect and continued to denounce lending at interest. But John Cullivan in Geneva, not surprisingly home for bankers, was actually favourable towards charging interest. And so from the 16th century, the argument is not so much whether interest is legitimate or not. It's just the sum that then continues an argument. I suppose my book continues it up to the current days, is what should the rate of interest be, not should there be any interest, charge, but what should the rate of interest be? That is the question, and I think that's a very modern question as well. It's one we grapple with, and we want to come back to this idea in a minute, Edward, of the kind of the everything bubble, because this might be, I think, you're hinting at this

Starting point is 00:24:04 might be an interest rate problem. But just back on that kind of line of thought, it seems like what you're telling us is interest is deep, it's fundamental, it's necessary for society. It's even an earlier form of social technology than money, which is something we've talked about. a lot on bankless. So society recognizes throughout the ages it needs interest. And yet we also recognize that after a certain amount of time, its utility erodes or needs to be kept in check because of this network effect of compounding interest, maybe some other effects. So power and wealth accrues to a degree such that a society can no longer tolerate it. And so we have things that we've embedded in our social protocols like debt jubilees, just wipe the slate clean. We also have a

Starting point is 00:24:49 of religious protocols that just say, no, that interest thing. We've tried that before. It's bad. It's morally wrong. So let's try to limit it that way. So there've been ways that societies have tried to contain it into a box. And there's this recognition that interest can go wrong and it can go wrong after some period of time in many different ways. I want to ask you the question, Edward, do you feel like we are living in a time where interest has gone in the wrong direction? I mean, it seems like societies and civilizations across history have had to hit the reset button or have had to do something to kind of rein in interest after one particular time. And maybe I'm using the wrong word.

Starting point is 00:25:29 Maybe what I really mean is debt rather than interest. But these two terms are kind of interrelated. So tell us about like the modern times we live in in this everything bubble. I mean, you indicated that everything bubble is maybe caused more by low interest rates rather than the madness of crowds that is very popular to ascribe these things to you, the meme stocks and that sort of thing. Anyway, link these together for us and tell us, is the everything bubble a symptom of interest gone awry? Yes, but let's get back to the earlier point you were making about interest and debt and debt jubilees. One definition of interest is the pretty obvious, the price of

Starting point is 00:26:07 leverage, the amount a person pays on a loan by definition. And as interest, comes down, you get more leverage in the system. So the problem isn't the compounding of interest at a time of falling interest. The problem is the compounding of debt. And we have been living through a period in which debt has continued inexorably to rise. And some people refer to this as the debt super cycle. And the debt super cycle has been interrupted on occasion by various financial crisis and bus, of which the latest and most severe was the global financial crisis of 2007, 2008. And after each crisis, we have taken interest rates down lower. And after each crisis, debt has continued to rise higher. And that is problematic for society. There has been a shift in who is

Starting point is 00:27:19 responsible for the debt and the sort of creditor base since the GFC. The GFC was largely created by the collapse of private sector credit and revealed excess indebtedness of the private sector, particularly starting with U.S. households, but also Wall Street banks and so forth. In the subsequent period, there have been some reduction in private sector debt relative to income, but a massive increase, as you know, in the government debt. So the overall debt has increased, but the portion of public debt has massively increased. What is the end point in the modern world, a world of fiat currencies, is the, Not a debt jubilee.

Starting point is 00:28:07 Debt jubilee is a bit too complicated, a bit too bold for our modern world. Too many vested interests are directly attacked if debt were forgiven. And I suppose it would lead to widespread and rather uncontrolled bankruptcies. So in the modern world, we have an alternative to debt jubilees, which is inflation. And the inflation reduces the reason. value of the debt over time, and that becomes the adjustment process. Inflation as the modern example of debt jubilee. That is so interesting. The slow jubilee. A debt jubilee in civilization's past has been, you completely wipe the

Starting point is 00:28:54 ledger. No one owes anyone anything anymore. All debts go to zero. Can you link this because, you know, the term inflation is misunderstood. How is this similar? How is this similar? to debt jubilee, Edward. Well, it's a inflation just quietly erodes the value of debt. It's a thief in the night. The economists have a term for this, financial repression. And financial repression is when the rate of interest is held below the level of inflation, and that serves to erode the value of the debt. Now, for instance, after the First World War, in Europe, in certain countries in Europe, France, Germany, Austria, Hungary. We had high inflation in France and hyperinflation in these other countries that wiped out the value of the debt. After the Second World War, you again had

Starting point is 00:29:49 inflation in Europe and in Japan to wipe out the war debts. But the British and the Americans went through a prolonged period of financial repression, in which roughly half their war debts were paid off by inflation rather than through repayment of the debts or by growth in GDP. It was the eradication of debt through inflation. And that, I think, is the norm of the modern world. And if you think about it over the last year, people have been pointing out that interest rates arising. But if you actually look at a chart of real interest rates, real interest rates have been lower in over the last year, than they were ever were during the so-called great inflation of the 1970s. So already that process of financial repression is kicking in,

Starting point is 00:30:44 and the debt burden will start to decline. And I'm not saying inflation difficult to predict, the path of the inflation difficult to predict. But I think the base case for thinking about our future, the current debt burden, is that it will mostly, to a large extent, be paid. paid off via inflation for an inflation debt jubilee. I think there's two ways that you could kind of listen to this.

Starting point is 00:31:09 One is you can kind of listen to what you're saying, Edward, and plan for the future as a result, make sense of the world around you and kind of what's happening with the financial markets and with society, knowing that there's this inflationary type of debt jubilee that is in process right now. But another question I have from, I guess, maybe your historical perspective here,

Starting point is 00:31:28 is oftentimes inflation is painted as the enemy. And I'm wondering if your perspective paints inflation in a different light. Is it like necessary that we have inflation for the functioning of society and kind of wipe parts of the debt every so often? Is that kind of the macro picture of things like what would you do without inflation? Society would not be able to function. What's your take on this? So I agree with what you say. I think I'm no great friend of inflation in itself.

Starting point is 00:32:00 I would like, you need, to have a stable money. I'd like to have a stable financial system for that matter. However, at different times, people's approach to inflation varies. If you're starting from a position of high debt, let's say high public sector debt, that can only be paid off through either economic growth or higher taxation, and let's assume, forget about the economic growth for a while, then let's just say the debt is going to be a burden on the tax. and the interest payments are burdened of the taxpayer, then obviously there's an interest in the

Starting point is 00:32:34 taxpayer not being overburdened. In recent years, the beneficiaries of the extremely low interest rates have been the corporations whose profit share has grown relative to the labour share. So corporations have done better relative workers. And older people have done better relative to younger people because older people tend to own their own houses, tend to have collected, done the bulk of their savings, and as those interest rates fell, the assets the older people owned rose in value. The low interest rate environment has benefited people in the financial sector, bankers and professional investors who've generated more fees relative to workers and executives in what you might call the real economy.

Starting point is 00:33:25 But obviously the low interest rates also through the enhanced value of stock-based compensation benefited senior management. So you can see that a period of higher inflation accompanied by rising interest rates, but not so high that they actually bring the system down and that not so high that they actually make it difficult to pay off the debt. But higher inflation and slightly higher interest rates would benefit. different parts of society. So I'm thinking that, you know, we're already seeing the low, low wage people having earnings growth, exceeding levels of inflation, and the better pay people,

Starting point is 00:34:06 their real earnings income is beginning to decline. We haven't yet seen this feed-through into falling corporate profits, but it's probably quite likely we'll see falling corporate profits at some stage. And, you know, obviously last year, massive sell-off in the bond and global equity markets. And so, again, valuations become lower. And that means that younger people who are starting to save are going to get higher returns on their savings at the expense of those who already had it. So there are a number of ways in which inflation will benefit quite large and influential sectors in society. One way of seeing inflation is really a battle among groups of society for a larger slice of the cake. There's a great American economist called Manka Olson, who wrote a book

Starting point is 00:35:04 called The Rise and Decline of Nations, in which he says inflation comes back through what he calls distributional struggles. So that's the early stages of inflation. I think once inflation has sort of done its trick, say paying down the debt, and once inflation has run out of control, then it becomes unpopular with a broader and broader section of the population until, at a certain point, the political will is there to bring inflation to an end. I mean, go back to, say, German hyperinflation, the whole thing happened in a relatively brief sort of two-year period, but at the end, they just had a monetary and fiscal reform in November 1923, and inflation just stopped dead in its tracks. If you think of the late 1970s, Paul Volcker, the Fed chairman,

Starting point is 00:35:57 jacked up the Fed funds rate into the mid-teens. And there was two pretty severe recessions in the US, but there was really a consensus that that was necessary to get the inflation out of the system. They only wanted to get the inflation out of the system by the time U.S. government debt had collapsed to, I don't know, less than 30% of GDP or whatever. So it just takes time. So people, I think, look on inflation in a rather simplistic way as if it's always unfair. But it presumes that the situation, the distribution of income and wealth when inflation starts is fair. And that's often not the case. So it's never been fair. We're just squeezing out where the unfairness lies through different kind of populations and demographics.

Starting point is 00:36:46 Yeah. Taking turns of unfairness. I think so, yes. I mean, so look, famously, you know, John Maynard Keynes, you know, points out the problems of inflation. But he also, at a certain stage, famously calls for what he says is that the euthanasia of the Rontier, the Rontier being the bondholder. And, you know, the bondholders often have no friends. So a bit of euthanasia. is sometimes in order. There's, Edward, a theme in The Price of Time book that is about the tug of war between what we call the natural rate of interest and then the implicitly, the implied unnatural rate of interest. There's this natural rate that's set by the market, and then there is this rate of interest

Starting point is 00:37:29 that the financial operators of an economy can divert away from. So, like, as a concept, can you just define the natural rate of interest for people and then illuminate the pattern of economies that go forth when the natural rate of interest is diverted from? So I really have two ideas of how you might define the natural rate. One is just, as you alluded to earlier, the market rate of interest.

Starting point is 00:37:55 And the market rate of interest would really appear in a world in which the money was constrained in supply, like any other good. And therefore, the market rate of interest would be the price for transfer. a limited amount of loanable funds, and it would reflect supply and demand for loanable funds. And I think that's probably what you had, let's say, before the beginning of modern banking, let's say in the sort of mid-17th century. Trouble is that, as you know, banks, what we call fractional reserve banks, they take in a deposit and then they lend out the deposit.

Starting point is 00:38:36 and through the act of lending out the deposit, they actually create a new deposit, and that new deposit creates new money. So there is no fundamental restriction on the growth of the money's supply. And then that's rendered more complicated when you get into a world of modern central banking, when you sever the connection of central bank reserves from gold, from a limited commodity, precious metal. So then you get really two-futable. forms of fiat of created money, the credit money of the banking system and the fiat money of the central banking system. So now money is no longer really constrained. So if money is no longer really constrained in its supply, what then is the market rate of interest? Does it reflect really people's

Starting point is 00:39:27 time preferences and companies' marginal return on capital? Probably not. It just reflects the activities of the banking system. In a modern economy, do the rates of interest that prevail, are they reflected in the natural rate, what the ideal rate of interest would be? And I would say no. I think one of the points the book tries to make is that there is a conventional wisdom

Starting point is 00:39:52 among monetary economists and central bankers is, oh, we know where the natural rate of interest is. It's a rate at which there's no inflation and there's no deflation. It's the sort of sweet spot between those two positions. Edward, this is central bank monetary policy. They want 2% CPI inflation, basically, and they're trying to adjust their thermometer,

Starting point is 00:40:17 you know, in terms of monetary policy to accommodate that. Exactly. And during the last decade, as you know, the central bankers took interest rates down to the lowest level in history, massively expanded their balance sheets with quantitative easing, and engaged in a whole number. number of other sort of tricks, hocus, pocus, operation twists, whatever, in order to manipulate

Starting point is 00:40:41 both short and long-term rates to the level at which they could meet their inflation target. And they did more or less throughout the post-crisis period in Europe and the United States, inflation was sort of roughly around the 2% target. And the central bankers would say, you know, we did a good job. We brought the Great Recession to an end. There was no repeater, of the Great Depression, unemployment came down, and we met our inflation target. So what's wrong? What's not to like? And I'm saying, well, actually, hang on a sec. Perhaps this inflation target is, you know, not all that it seems. And for that argument, I go back to a critique of the earliest iteration of inflation targeting that occurred in the 1920s, which was then known as price stability.

Starting point is 00:41:33 was really just sort of zero percent inflation, but sort of roughly the same thing. And the young Austrian economist Friedrich Hayek, who was at the time in the early 20s, was actually starting his PhD thesis on the Fed central bank policy at NYU. Hayek made this, what should really seem like a pretty obvious point is that in an economy with productivity growth, with new technologies that actually deliver productivity growth, that improve efficiencies of production, then the natural tendency of the price level would be to decline. And so actually at a time of productivity growth in a modern capitalist society, you should see a mild or possibly sometimes even stronger decline in the price level,

Starting point is 00:42:24 just like we used to expect, you know, computer prices to come down every year. And what I then argued is, well, if you aim at stable prices, and you can stand the argument to the modern day, if you aim at a 2% inflation target at a time of productivity boom, and we could also, sometimes people refer to it not so much as a productivity bloom, but as a supply, a benign supply-side shock. And that, but in recent decades, the great supply-side shock that brought prices down was globalisation, and in particular the entrance of China into the global trading system and its massive growth in export shares.

Starting point is 00:43:06 So you would normally have expected during this period when world traded goods prices were inexorably declining that the price level should be declining. But nevertheless, the central bankers with their fixation on this 2% inflation target and their fear of deflation. But what they feared was what Hayek would have called the good deflation that comes from positive supply shocks and rising productivity. So the central bank has acted against that declining price level. And in the process doing so, they brought the interest rates down very low. And then you get, what did you get?

Starting point is 00:43:46 You've got the succession of speculative bubbles. You got, as I argue, misallocation of capital. You had a huge amount of risk taking you had to build up. of leverage. So, and that in fact, actually what's quite, I mean, not amusing, it's sort of tragic, is that buildup of leverage prior to the global financial crisis, which to my mind was induced in large measure by the Greenspan Fed's easy money policies after the dot-com bubble, that then creates genuine deflationary problems when the banking credit bubble bursts. And one of my points in the book is I don't think this narrow inflation targeting to discover the natural rate of interest

Starting point is 00:44:34 is actually useful. I say, which I don't say, but I was talking to an economist friend of mine the other day, and apparently there's a late medieval school of economists called the School of Salamanca whose main protagonist says the real rate of interest is known only to God. So yeah, I think that's probably true. But then, you see, if the real world, rate, if the natural rate of interest isn't revealed just by inflation or deflation, then I think what I say in the book is, you know when you haven't got the natural rate of interest, when you know when the rate of interest is wrong, is that when you're getting these asset price bubbles or this excessive risk taking or this buildup of leverage. So these are other

Starting point is 00:45:17 indications that the interest rate has been set wrong. And I mean at this stage, I just introduce another idea, which we haven't really discussed, which is, a point made by a Yale economic financial historian called Bill Goetzman. He says interest is the most important invention in the history of finance because it allows transactions to take place across time. Now, Hayek in the 1920s, started to play around with this idea of what he called intertemporal disequilibrium. And intertentis equilibrium is, frankly, when there is a imbalance between the present, your present activities and your future required activities. So if you

Starting point is 00:46:04 have too much debt, you have an intertemporal imbalance. If asset prices are overinflated, that's another form of intertemporal imbalance because the returns on the assets when they're superinflated are not going to meet the requirements of investors who purchase those superinflated assets. They're going to lose money. So my argument is, is that I'm going to go back to the question of what the natural rate of interest is. It may not be discoverable, but it would be a rate at which there is an intertemporal balance between current borrowing, saving and investment and future consumption. And I think I'm pretty convinced that we have got our financial system and economies

Starting point is 00:46:51 into a state of pretty acute inter-temporal dis-equilibrium. You know Uniswap. It's the world's largest decentralized exchange with over $1.4 trillion in trading volume. You know this because we talk about it endlessly on bank lists. It's Uniswap. But Uniswap is becoming so much more. Uniswap Labs just released the Uniswap mobile wallet for iOS,

Starting point is 00:47:12 the newest, easiest way to trade tokens on the go. With a Uniswap wallet, you can easily create or import a new wallet, buy crypto on any available exchange with your debit card, extremely low fiat on-ramp fees, and you can seamlessly swap on mainnet, polygon, Arbitrum, and optimism. On the Uniswop mobile wallet, you can store and display your beautiful NFTs, and you can also explore Web3 with the in-app search features, market leaderboards, and price jars, or use Wallet to connect to any Web3 application. So you can now go directly to Defi with the Uniswop mobile wallet, safe, simple custody from the most trusted team in Defi. Download the Uniswap

Starting point is 00:47:45 wallet today on iOS. There is a link in the show notes. Arbitrum 1 is pioneering the world of secure Ethereum scalability and is continuing to accelerate the Web 3 landscape. Hundreds of projects have already deployed on Arbitrum 1, producing flourishing defy and NFT ecosystems. With a recent addition of Arbitrum Nova, gaming and social daps like Reddit are also now calling Arbitrum home. Both Arbitrum 1 and Nova leverage the security and decentralization of Ethereum and provide a builder experience that's intuitive, familiar, and fully EVM-compatible.

Starting point is 00:48:17 On Arbitrum, both builders and users will experience faster transactions, with significantly lower gas fees. With Arbitrum's recent migration to Arbitrm Nitro, it's also now 10 times faster than before. Visit Arbitrum.io, where you can join the community, dive into the developer docs, bridge your assets,

Starting point is 00:48:33 and start building your first app. With Arbitrum, experience Web3 development the way it was meant to be. Secure, fast, cheap, and friction-free. How many total airdrops have you gotten? This last bull market had a ton of them. Did you get them all?

Starting point is 00:48:46 Maybe you missed one. So here's what you should do. Go to Earnify and plug in your Ethereum wallet, and Earnify will tell you, you if you have any unclaimed airdrops that you can get. And it also does poaps and mintable NFTs. Any kind of money that your wallet can claim, Earnify will tell you about it.

Starting point is 00:49:00 And you should probably do it now because some air drops expire. And if you sign up for Earnify, they'll email you anytime one of your wallets has a new air drop for it to make sure that you never lose anirdrop ever again. You can also upgrade to Earnify premium to unlock access to airdrops that are beyond the basics and are able to set reminders for more wallets. And for just under $21 a month,

Starting point is 00:49:18 it probably pays for itself with just oneirdrop. So plug in your wallets at Earnify and see what you get. That's E-A-R-N-I.F-I. And make sure you never lose another air drop. Learning about crypto is hard. Until now, introducing Metamask Learn, an open educational platform about crypto, Web3, self-custody, wallet management,

Starting point is 00:49:37 and all the other topics needed to onboard people into this crazy world of crypto. Metamask Learn is an interactive platform with each lesson offering a simulation for the task at hand, giving you actual practical experience for navigating Web3. The purpose of Metamask Learn is to teach people the basics of self-custody and wallet security in a safe environment. And while Metamask Learn always takes the time to define Web3 specific vocabulary, it is still

Starting point is 00:50:01 a jargon-free experience for the Crypto-Curious user. Friendly, not scary. Metamask Learn is available in 10 languages with more to be added soon, and it's meant to cater to a global Web3 audience. So are you tired of having to explain crypto concepts to your friends? Go to learn.medmast.io and add Metamasklearn to your guides to get onboarded into the world of Web 3. So we are living in a place.

Starting point is 00:50:26 Of course, only God knows the natural interest rate. And Jerome Powell is not God, of course. I don't even think you would think that. But we are living in a time of an unnatural rate of interest set by central bankers of the fixation on this 2% interest. And it's causing this intemporal balance, this kind of distortion of the present and a disequilibrium with the future. And you're saying some of the symptoms

Starting point is 00:50:50 of this are maybe, I'm linking this to the earlier part of the conversation, the everything bubble. And what's interesting about the kind of the everything bubble that we're in right now is you look at phenomenes that have happened over the last couple of years. Like you look at cryptocurrency, of course, as shot up in price and different kind of, you know, NFTs. And there's value there, of course, but there's a lot of memetic value. It seems to be caused by sort of low interest rates. You look at meme stocks. That is another symptom of this. You look at the, asset prices everywhere that have completely swollen. And I think there's a tendency of media or just kind of a gut reaction to blame the madness of crowds as causing the bubble. It's like, this is another

Starting point is 00:51:32 two up mania or something. And you're saying it's more a symptom of this low interest rate environment. Yes, speculative bubbles are inevitable. But this one in particular, at this point in time, does it seem like it's fueled by this low interest environment, this unnatural interest rate that we're living in? Can you link this up for us, Edward? So as you know in the book, I have a chart somewhere which shows US household net wealth, which the data that the Fed has been collecting since early 1950s. And what we see over the last 25 years is quite clearly bubbles appearing in household net wealth, coincident with the bubbles we've been living through. So you see a little sort of hillock of a bubble with the dot-com bubble and then a somewhat larger increase in net wealth

Starting point is 00:52:24 to GDP by 2007, coming down in 2008. And then you see this Everest of a bubble forming and peaking at the end of 2021, at which point U.S. household wealth is roughly 100 points of US GDP greater than its long-term average. And what's quite interesting is that I didn't mention it in the book, but I did run the numbers with an analyst a few years ago. And what we found is that in the old days, the increase in household net wealth would actually coincide with actual savings in the U.S. system. and then it became completely divorced from savings. So the bubble then appears to be growing, and I show this in the chart, that at each cycle of these three bubbles,

Starting point is 00:53:18 the Fed Funds rate has been lower and lower and lower. So as the interest rate came down over the course of the cycle, household wealth got higher and higher. And that's all household wealth aggregated together. Now go to the everything bubble. There's obviously, you know, there are other factors at play, all the autis and retards on the Wall Street bet subreddit. You are familiar then.

Starting point is 00:53:49 Yeah, I am. I was early on to that. And then rushing off to the Robin Hood app where there's, you know, stock trades are gamified as the Massachusetts regulators complaint. And then, you know, high turnover. And then you get this, one of the themes, if you remember, from Deviltate the Hymus is that changes in communications technology feed through to speculative bubbles. And so that one aspect of the everything bubble would really probably have occurred under a different monetary environment. But, you know, one of the things, as you're probably aware, that Robin Hood offered its loyal, long-term investing clientele was 2% margin loans.

Starting point is 00:54:32 or if you paid them, you know, if you were a premium customer paying them, I don't know what, $60 a month or something, you actually got free margin loans on Robin Hood. So you could leather the hell out of the mean stocks that you were buying. And as you saw at the time, US margin loans in aggregate were, you know, at a peak high during the everything bubble. There is a point I make in the book, pretty obviously anyone who's done any finances, is that long-dated assets whose returns are in the distant future, you might call them growth stocks or whatever, obviously benefit more from a reduction in the discount rate than stocks that have a shorter payback period. So what we find and what we saw in the period running

Starting point is 00:55:16 up into the everything bubble is that so-called value stocks, short duration stocks, investments did relatively poorly, and growth stocks and long-duration investments did, Well, and then I argue that assets with no income at all did best of all. Yes, they did. And so you could say, as people, you know, some wag said in the 1920s that the market was discounting the future and the hereafter. By the way, so yesterday I read somewhere, you remember the SPAC King Chamath? Yes. And say yesterday, have you seen his, I read a comment by Cheyenne.

Starting point is 00:55:59 he says, the mathematical truth of higher interest rates is that it renders your company valueless. That is sort of slightly giving the game away, isn't it? So the SPAC bubble, you know, of companies that basically under anything approaching a normal rate of interest were valueless according to one of its, you know, most prominent expounders, you know, something to behold. And as I say, those SPAC companies look very much like the bubble companies that appeared in Britain during the South Sea bubble of 1720, another period in which interest rates had been declining. And you had this semi-fraudulent and outright fraudulent companies floated in the coffee houses of the city of London.

Starting point is 00:56:49 The most famous one being a company of great advantage, but no one to know what it is, which is your almost a perfect definition for a SPAC company. There's a lot to talk about with the relationship of time and financial bubbles and also interest rates, right? I think the special things about the price of time book is that if you really summarize like what is interest, it's summarized in the title of the book. You've done a fantastic job summarizing the entirety of the price of time book into the title. I mean, obviously when one's writing a book, one has a file open saying, well, the hell am I going to call this book? So I did play around with the title for a while. and there are, you know, so many different definitions of what interest is.

Starting point is 00:57:30 But the important thing is, as I say, to mention the time dimension, and then to bear in mind that all our economic and financial activities take place overtime, necessarily. And then if you think about it, once you understand that time has value, as Ben Franklin said, time is money, once you realize that time has money, once you realize that time has value, value, then it should start becoming immediately clear that taking interest rates, the price of time, down to zero, is highly unnatural. It would be like depriving an animal of oxygen. And taking them to negative becomes almost insane. And what it does is a negative price of time actually starts

Starting point is 00:58:24 moving the clock backwards. And what we saw at the peak of the everything bubble is that we'd entered into a financial wonderland in which the craziest things were happening. I mean, so one example of that. As interest rates were falling ever and ever negative, bonds were delivering tremendously good returns because you get capital gains on the outstanding bonds as the rates fell negative. And so people were actually thinking at a time when, say, $18 trillion worth of bonds were trading at negative yields, that you bought bonds with negative yields for capital gains, whereas you hold stocks for income.

Starting point is 00:59:12 I mean, there are so many different areas in which, when one looks back on 2020 to 21, that what was happening there was quite surreal. real. And I think this zero negative rate of interest, the lavishness with which the central banks borrowed, I think roughly so globally issued $8 trillion worth of reserves during that period to buy securities. I'm pretty sure is the main mover of these crazy markets. Yeah. The articulation that when interest rates go negative, that part in the book where, just like you said, people would buy equities for the revenues that the company would make, the value of the dividends and then people would buy bonds for the capital appreciation. It's like,

Starting point is 00:59:59 well, the negative interest rates are making the clock go backwards. And they're also making the role of bonds fill the role of equities and the role of equities fill the role of bonds. Like everything is just upside down. I thought that was just like a great articulation of the whole book. I'm wondering if you could do a similar unpacking of devil take the hindmost, just as a title. Why is the book titled Devil Take the Hindmost? Why that title? There is is a theory of what's called the rational bubble. If you come across the rational bubble theory, which was it's rational to buy an asset, provide even if it's overpriced, if you can be assured that there will be a sucker to buy it off you at a higher price. I've never been a particular

Starting point is 01:00:42 fan of the rational bubble theory, but the greater fool theory. But what I've found, you know, reading the history of financial speculation, is that people who engage, you know, engaged in the bubble in speculative activity. You know, obviously, it's had that sort of mentality. If you will, it's your pyramid scheme, your Ponzi scheme mentality of, I'll buy it and pass it off to someone else because I'm in an early stage of the pyramid scheme. And what one speculator in the South Sea bubble of 1720, the English South Sea bubble of 1720 says, is when the rest of the world is mad, we must imitate them in some measure.

Starting point is 01:01:23 and let the devil take the hindmost. And the devil take the hindmost. It's actually, there's a legend, Spanish legend, that the devil would arrive, I think, in the Spanish city of Salamanca, and there would be a race of the young priests of the seminary. And the idea is the devil would take

Starting point is 01:01:43 the young priest, the seminarian, who was slowest. And, you know, that is, there's clearly an element of that in every speculative bubble, which is, hey, you know, I'm sorry, smarter than the suckers. I spotted this earlier. The truth is, obviously, at some level, a speculative bubble is a transfer of wealth between speculators. And if you are in early and out early, then, you know, the game's worked for you. Edward, one thing that's clear to me after reading both of your books is that we keep on, we as a species, as a society, run through

Starting point is 01:02:16 the same things over and over and over again. And I think by the time when I was going through double take the hindmost, I had gotten to the 1920s. And I was already like face palming about like, oh, we're about to do this all over again. And that was the 1920s, right? We still had a number of financial bubbles ever since. And so it's interesting to take the position of a historian and an author and a researcher when looking at these things. And I'm wondering if you could just like, I don't know, audit the human species, the human society as like our ability to navigate these interest rates and speculative bubbles in financial markets, how much have we been able to learn from our ancestors in lessons of old? Because it seems to me not much. Are we getting any

Starting point is 01:03:00 better at this? Are we getting any better? I think we're getting actually a great deal worse. First of all, I mean, it's a platitude to say that human psychology doesn't change. Jim Grant, financial journalist, historian, I think he says somewhere that in science or engineering, progress is linear, whereas in finance it is cyclical. We learn from our mistakes as a society and individually. So that's fair enough. But why might things be getting worse, which is problematic? First of all, I think that the technology brings larger amounts of players into these games,

Starting point is 01:03:44 if you want to call them that. And so, as you see, as you mentioned earlier, Robin Hood, and in China, you know, stock brokerage is found, you know, with tens of millions of speculators playing the game. So I think the technology broadens things. I think it makes it easier to create these information cascades, these little bubbles. You know, Twitter would seem to be a perfect place for forming bubbles.

Starting point is 01:04:11 They might be speculative bubbles. and my view is that to great extent the sort of the fears of the pandemic was a sort of fear bubble, also generated by social media. So I think that's one reason why problems might be getting worse. And then we've got the attitude of the authorities. In principle, if you're going to learn from your mistakes, you should suffer some pain and loss. But if the authority's response to each one of society's financial failures is to underwrite the losses and to encourage the re-emergence of exactly the same type of behaviour that got you into trouble in the first place, whether speculating or over-leveraging or whatever, then you're not really going to learn from your mistakes. In fact, you may even

Starting point is 01:05:03 have a situation in which the sort of evolution of the sort of play out speculating population will actually suffer from adverse selection. You know, the early part of the last decade, I was working for this firm called GMO in Boston, a sort of value-driven investment firm. I was in the asset allocation team. We like to think of ourselves as not buying assets that were overvalued relative to their historic norms.

Starting point is 01:05:31 It was a very difficult environment, as you can imagine, in which to operate. You saw after 2009 with interest rates, taken to zero and large amounts of QE. The markets came back very, very quickly, financial markets. US market actually went to a high valuation relative to its historic norm and then continued compounding at 10% a year for a decade. And by the end of 2021, by the end of the everything bubble, the US stock market, as you probably know, was the highest valuation on any number of different valuation measures, but let's just stick with the cyclically adjusted price earnings ratio,

Starting point is 01:06:13 sometimes called the Schiller BE, after Robert Schiller, who collects the data at Yale. And what you see is that that was the second highest valuation of the US stock market in 2021, except for the just last gasp of the dot-com bubble. And yet it was very difficult for an investor not to be sucked into that bubble, because if you didn't get sucked, into that bubble, you would underperform and your clients would take their assets away, which is why my old boss, Jeremy Grantham at GMO, says that the really, he thinks the biggest driver of markets, he's not particularly interested in my whole interest stuff. He thinks the biggest driver of markets is what he calls career risk, which is if you try and battle a bubble,

Starting point is 01:07:00 you will be sacked. He often cites the comment of Keynes from the general theory where Kane says, in the world of professional investment, it is better to fail conventionally than to succeed unconventionally. I'm just veering a tiny bit away from the original question, but my point is that if we don't learn from our mistakes and if the authorities, if you will, reward us for making mistakes, then obviously our mistakes are going to get bigger and bigger. So, Edward, as a result of just doing just deep research across like hundreds of years of examples of humans engaging in speculative behavior and financial operators turning into financial manipulators. You do a great job writing your books, maintaining a decent amount of

Starting point is 01:07:47 like neutrality and objectivity and simply just telling the story. But I'm wondering if you just have developed your own personal opinions about like what makes good economics. So at least in the crypto world, we have debates about fiat money versus commodity money versus commodity money versus commodities. We have debates about Austrian economics versus Keynesian economics. I'm wondering just like, how have you landed in the world of economic debate? So the crypto world, I take it, is, it's quite sympathetic to Hayek's idea of the denationalization of money. And my book has quite a lot of Hayek in it. I mentioned earlier the Hayek's comments on targeting monetary policy on movements in the price level. And then towards the end of the book, I sort of discreet. I sort of

Starting point is 01:08:34 discuss Hayek's notion of the road to serfdom. And what I argue is that if interest rates are constantly manipulated by the authorities, they will weaken the economic system, they're weaken economic growth. And they will require the central bank to play a larger and larger role in the allocation of capital. And that we were, we appeared to be moving in the, in recent years, into what you might call a period of central banker capitalism in which the central banks were the main determinants of what was going on, both in the financial world, but also in the real economy. And this was a creeping process which would then undermine a capitalist system based on free enterprise and individualism. So I think that Hayek is, you know, is a major influence on that book.

Starting point is 01:09:29 And if you want to know, David, you've one difference between Devil Take the Highmost and this new book is, when I wrote Devil Take the Highmost, I hadn't actually read Hayek, which is sort of probably pretty standard for most economists nowadays. They haven't read Hayek either. And then I got into Hayek just over sort of 20 years ago when I started, you know, roughly 20 years ago, when I started sort of looking at the credit bubble that was forming in 2003. And then that's when I started reading a bit. of Hayek. This book has recently been awarded the 2023 Hayek Prize. So that was, you know, very gratifying for me because, you know, the morning I received the prize, I was reading my wife extracts of the road to surf and saying, darling, this is all so relevant to today. Anyhow. So yes, Hayek is definitely an influence. And I don't know if you, did you pick up in the last paragraph of the postcript, I think this might be interesting place to move the conversation. I discussed the idea of whether a cryptocurrency or a central bank digital currency might replace the fiat currencies of the current world, the fiat currencies and the bank created,

Starting point is 01:10:48 if you will, fountain-pen money. And by having a currency that was truly limited in supply, we would then get back to discovering what was the natural rate of interest or market rate of interest. And if we were able to make that transition, we would then, once we had a market rate of interest that was closer to people's time preferences, for want to ever better word, we would have less build up of debt, less speculative bubbles and sounder financial markets and probably stronger economic growth. I didn't elaborate at that point at great detail, but that was my sort of parting shot. Yeah, can you elaborate a little bit more? So that's very interesting. Yes, you are right. The crypto community is very big fans of Hayek. It quotes him often. So how do you see crypto at this place and time? It sounds like maybe what you're alluding to is we have this bank-created

Starting point is 01:11:45 fountain pen money. You know, money printer go burr is what we in crypto say. And it's leading to unnatural interest rates. And are you saying, Edward, that you see, crypto, this non-central bank-controlled monetary unit, do you see that as kind of a check on power, a way to maybe restore balance and get us closer to something that looks like a natural interest rate? Well, possibly is my answer. I don't profess to know as much about the crypto world as you do, but my intuition when I was finishing the book in late 21 was that there was a lot of scudgery in the crypto world. And there were a lot of what appeared to be sort of Ponzi schemes operating in the crypto world. And that seems to have been somewhat borne out by the crypto winter ensuing last year and the

Starting point is 01:12:38 failure of Sam Bankman Fried's miscellaneous activities. Ah, you heard about that one, did you? Yeah, I did. I actually wrote a piece. I was one, I wrote a piece in which I said that I thought that actually that SBF wasn't actually conducting a fraud but a spoof. Because if you look at his interviews, he actually seems to be telling his interviewers and the public that, hey, this whole thing is really corrupt, you can't really value anything. And then, of course, you know, that famous advertisement with Larry David, where he's just saying, you know, hey, this doesn't work. Well, actually it didn't work.

Starting point is 01:13:14 So anyhow, my thought was that probably as things stood at the early stages, that, of crypto is that it didn't really have the wherewithal become an alternative currency or money. And I think in particular, one definition of money is as a social network. Fair enough, you can have, I mean, all number of different things have been money historically. I think I've got an excellent book by someone called Paul Einzig. Have you seen it called Primitive Monies? You've seen that, which is a great book, which you must read if you're interested in money, because he just lists all the various primitive monies and including, I think,

Starting point is 01:13:48 rat traps were a form of currency in one in rat traps. Rat traps. Anyhow, but the thing is that for money to be accepted, it mustn't be only accepted by a community of users, but also has to perform the sort of state money function. And what we clearly know is that the governments are not going to give up their monopoly on legal tender without a bitter fight. I read a piece last week for the column I write for Reuters' Breaking Views, which was based on a conversation I have with a friend of mine who called Thomas Meyer, who's a German economist, used to be chief economist of Deutsche Bank. But Thomas is a very keen Austrian economist. Although the Austrian Hayek is associated with the private money, Thomas has this idea that a central bank digital currency, if it was issued to increase at a certain rate, the sort of protocol, to increase at a certain rate in line with your average nominal GDP growth or whatever, over a certain period of time,

Starting point is 01:14:58 if that CBDC were to replace bank deposits so that banks were no longer in the business of creating money and that banks would no longer be subject to bank runs, then you could have a sort of sort of, I think, what I call a digital Chicago plan or digital narrow banking. Now, Thomas says, you know, when I was talking to him, he said a couple of things about his, this Thomas says, digital Chicago banking. First of all, he said it wouldn't necessitate getting rid of paper currency. So that fear, and I think quite legitimate fear, that if you issued a CBDC, the central bank would be tracking every one of, you. your actions. And I mentioned that in the book, you know, the CBDC as a digital panoptican.

Starting point is 01:15:51 That could be somewhat abated. And Thomas also says that in his world, you could have your CBDC and your narrow banking. There would also be room for competing crypto currencies to operate. So it would, I mean, Thomas is really suggesting a way in which you could harmonize the, you know, Hayekians' denationalization of. of money idea with, if you will, the sort of state theory of money idea of what's you called George Knapp. And it's an idea. I mean, what I think is quite interesting about it, as you know, the central banks are now sitting on masses of bonds as a result of their QE, and they don't know what to do with them, and those bonds are on a mark-to-market basis starting to produce losses.

Starting point is 01:16:41 but the banks are also sitting on massive reserves with the central banks. Now, if you want to introduce a central bank digital currency along Thomas's line, and this is very much along the lines of the Chicago plan mooted in the 1930s by the likes of, well, of Irving Fisher and Chicago economists like Frank Knight, what you need to do is the banks need to surrender their bonds to the central bank to be issued with reserves, then become your narrow banking. So we're sort of halfway there, or even three quarters of the way there, without anyone planning.

Starting point is 01:17:24 And then another really interesting thing, which I hadn't really understood about the original Chicago plan. And I've actually got you, on my desk, I've got Irving Fisher's book 100%. It's actually worth reading you the, I don't know if you've come across this book. this is Irving Fisher's 100% money, which is his Chicago plan. He says 100% money designed to keep checking banks 100% liquid to prevent inflation and deflation,

Starting point is 01:17:53 largely to cure or prevent depressions, and wait for it, to wipe out much of the national debt. And the reason you wipe out much of the national debt is that when you issue, when you move over to the Chicago plan, the central bank soaks up all the government bonds and issues its new state-backed money. But the state-back money doesn't actually pay interest. And so because it doesn't pay interest, there is a one-off enormous seniorage gain for the currency issuer. And that, according to Thomas Meyer, that would amount in Europe to roughly, within the Eurozone, to roughly half of the outstanding European government. debt. It would wipe out six trillion dollars of government debt. And I'm going to get the

Starting point is 01:18:45 number slightly wrong, but I think that sort of holdings of the ECB are roughly, I'm going to say roughly three trillion. So you're halfway there towards making the conversion. I mean, I don't know what your views on 100% money are or on bringing an end, fractional reserve banking. But what it occurs to me is that anyone who's thought about the problems of finance for long enough eventually comes to the conclusion just, you know, we cannot have fractional reserve banking, you know, running amok and destabilizing the financial system time and time again. And what's interesting to me, when I start reading about the Chicago plan, is you find economists of very different persuasions, you know, the Keyneson economists like James

Starting point is 01:19:37 Tobin Nobel laureate or monetarist economists like Milton Friedman coming around to the same plan. So potentially that solution. As for the cryptos, the way I see it is this, is that if we have a badly designed central bank digital currency and the chance that we probably will to, and if embedded in that badly designed digital currency is either an inflationary tendency or a or the sort of digital panoptican aspect in which all our actions are being followed,

Starting point is 01:20:15 then I think that one type of cryptocurrency will then establish itself for a lot of transactions, that transactions that people don't wish to have surveilled by the state. And I'm not saying that just necessary sort of, you know, drug running and terrorism. But just, you know, people are, I think are happier, you know, frankly that Visa or MasterCard should see their credit card transactions than that an arm of the state should actually be able to create a profile of everything you're doing. Perhaps anyhow, the NSA is already creating such a profile, but they don't really want to see the state

Starting point is 01:20:58 engaged in that. And as I say, go back to Hayek, somewhere he says the invention of money is the most powerful instrument for freedom ever created. And I think that the sort of the Chinese central bank digital currency plans, the digital yuan or whatever you want to call it, that I think is the strongest totalitarian instrument that has ever been conceived. And when you bring it together with Xi Jinping's, what's it called, you know, the credit system for rewarding good pay and punishing bad behavior, social credit. If you merge it with social credit, you have a much stronger control of your population

Starting point is 01:21:41 than was really an offer, no communist or fascist society in the past would ever have been able to control people with such a strong rod. So yeah, I think going down that route, there is a crypto future. And then, as the crypto folks all been saying, since the run on Silicon Valley Bank.

Starting point is 01:22:03 The run on Silicon Valley Bank is not just showing the instability of the banking system, but it also shows the central bank, the Fed and the federal government, through the pension benefit guarantee corporation, taking on more and more responsibility, underwriting loans, underwriting deposits. And when that has taken too far, you move clearly. closer to a collapse in the monetary system. And it's at that time that then, frankly, alternative stores of value become attractive. It's what you had during the German hyperinflation,

Starting point is 01:22:46 there was something they called, it's quite a good phrase, it's good, fluked in desacverton, which means flight into things of real value. Now, I think then you just have to conceive what real value is. And perhaps because I'm a bit older than you guys, I have a bit of sort of the gold bug about me. It's coming back, Edward. Yeah, yeah. You know, my friend Felix Martin, who's fellow's sort of financial historian, right, he refers to gold as man's oldest bubble. And I'm quite attracted to man's oldest bubble, and that's one way. And as I say, a well-designed crypto would be an alternative. Edward, it's been an absolute pleasure to have you on the show and for giving us so much information, for giving us your knowledge. I guess a couple of comments on what you just said. This idea, I think you are one of us in some core ideas, this idea that money is a freedom technology. That's a Heikian idea. It's also a deeply embedded crypto idea. And this idea that we are converging towards a central bank digital currency. And so maybe the end of this decade, maybe a little bit longer, maybe sooner, there will be two forms of,

Starting point is 01:23:58 digital money. There'll be a central bank digital money, which is not as free, is kind of the crypto prediction, and an alternative money that is free, which is crypto. I would love the idea of digital Chicago Bank to come to fruition that protected citizen rights, that didn't give away our privacy, that didn't have an inflation as a seniorage fee attached to it. I just, with the central banker capitalism that you've rightly identified, it's hard to imagine that that world exists, but we'll be pushing for that as well. there's so much more we could talk to you about. And I feel like as this progresses, this is one of the most interesting times, I think, in monetary history, at least in recent times. I don't know if this is

Starting point is 01:24:37 the most interesting in your decade, but we're in your lifetime, but we're really seeing new things come arise this in years. And so I feel like we should have you back on again to talk us through that. But I want to end with this last question. Do you have any predictions on what's going to happen next. Just general predictions, given what you've seen across time with other societies and other civilizations and the place we are now. As David said earlier, when he was reading Devil Take the Highmost and you guys in the 1920s, he smacked his head because we're going to do it again. And I feel like now is the 2020s. And I feel like this is a head smacking moment. I feel like we're about to do something again. What do you think that thing is? So perhaps we are in the late 20s.

Starting point is 01:25:22 we've gone beyond 29. I mean, if we were the 20s, then we're in 1930. What I think is this, and just stick to the sort of main thrust of the book, the new book, the price of time, is that the entire financial system and the economy itself became adapted to these extraordinarily low interest rates. And as that begins to change with inflation coming into the system and interest, rates rising. Then the House of Cards begins to collapse. And so far, you know, we've seen big crash in the UK guilt's market and the near bankruptcy of the UK pension funds. We saw, you know, the crypto winter that we've mentioned. And then the regional banking crisis kicked off with the collapse of Silicon Valley Bank. You know, my strong thought is that this

Starting point is 01:26:18 has further to go, that we're not at the end of the process. It's not, you know, it's not, you know, in baseball terms, we're not in the ninth innings. I don't think we're in the eighth innings. I think that are, you know, going to be very long, prolonged and difficult period of transitioning out of this ultra-low interest rate environment. And go back just finally to that point I made about US household wealth. I looked at the data from recently published by the Fed. It hasn't really come down very much from its highest level in 2021. So, I think there is going to be a large evaporation, should we call it, not destructive. There can be a large evaporation of wealth.

Starting point is 01:27:02 I think that a lot of that evaporation of wealth will come from nominal assets, paper wealth in the claims fixed income, securities and the like over the following years as we get this financial repression. So that I think, you know, it's going to be a challenge for investors to retain their wealth, but, you know, it's not impossible that people who position themselves prudently shouldn't, you know, more or less retain their purchasing power. Edward, what a great way to close. Thank you so much for joining us on bankless today.

Starting point is 01:27:35 My pleasure. Bankless listener, I reminded of that quote as we close that those who forget their history are condemned to repeat it. I almost feel like even those who remember their history are also condemned to repeat it. It feels like we're going through the cycle one more time. And, of course, we'll be with you in this cycle, in this new monetary experiment that's being run both in crypto and in the world of fiat, some action items for you today.

Starting point is 01:27:57 The first is go pick up the book, The Price of Time. There's a link in the shit notes. Absolutely fantastic book. Also, Devil Take the Hindmost was one of our formative books in kind of learning about speculative bubbles. These things apply directly to crypto, all right? So very important historical lessons here. Yield and bubbles, we know these things. Yes, yield and bubbles.

Starting point is 01:28:18 That's what this whole thing is. We also have some links to primitive money, the Digital Chicago Plan, which was the column and the Irving Fisher book 100% money. Some of these I have not taken a look at. So a plan to go do my homework after this episode. Got to end with this. Of course, none of this has been financial advice. Fiat, economies, interest, finance markets, it's all risky. So is crypto.

Starting point is 01:28:41 You could lose what you put in. But we are headed west. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot. Thank you

Bankless - 171 - What Causes Bubbles? with Edward Chancellor - "The Price of Time"

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.