The Great Simplification with Nate Hagens - Edward Chancellor: "The Price of Time"

Episode Date: April 19, 2023

On this episode, financial historian Edward Chancellor joins Nate to give a meta-history of interest rates and human societies. With recent news of global financial turmoil in response to rising interest rates, taking a look at our history could help us interpret our present and plan for the future. How deeply entangled is this financial predicament that we've gotten ourselves into? Can we learn from the past to reshape a more stable monetary policy in the future, or are inflating financial bubbles (and popping them) simply in our human nature? About Edward Chancellor: Edward Chancellor is a financial historian, journalist, and investment strategist. He is the author of Devil Take Hindmost: A History of Financial Speculation and his latest book, The Price of Time, where he explains the story of capitalism is really the story of interest: the price that individuals, companies and nations pay to borrow money. He is currently a columnist for Reuters Breakingviews and a contributor to the Wall Street Journal, MoneyWeek, the New York Review of Books and Financial Times.  For Show Notes and More visit: https://www.thegreatsimplification.com/episode/67-edward-chancellor To watch this video episode on Youtube → https://youtu.be/q5PWaYw6h5k

You're listening to The Great Simplification with Nate Higgins. That's me. On this show, we try to explore and simplify what's happening with energy, the economy, the environment, and our society. Together with scientists, experts, and leaders, this show is about understanding the bird's eye view of how everything fits together, where we go from here and what we can do about it as a society and as individuals. What is the price of time? We don't think about it much, but since we are biologically finite life creatures, we do put a price on time, and that is what we culturally refer to as an interest rate. Joining me today is financial historian Edward Chancellor to discuss his recent book called The Price of Time, which is a history of interest rates, the $5,000. year up and down ride of interest rates and human cultures, specifically the highest and lowest

rates of interest ever in the last 40 years and how low interest rates today have fueled what some could defend as the largest bubble in the history of our species. Mr. Chancellor is a former Wall Street professional. He writes for Reuters. and the New York Times and other financial press publications, financial times. And we had a wide-ranging discussion on finance, interest rates, and the future. Please welcome, Edward Chancellor. Greetings, Edward. Welcome.

Nate, thanks having me. It is a pleasure. So in addition to some mutual friends, I think we have at least one other thing in common. We were both on Wall Street in the early 90s. I don't know you were at Lazard. I don't know if that was in New York City, but I was at Solomon Brothers and Lehman Brothers in the early 90s in New York. I was in there.

I was at Lazard, what was called Lazard Brothers in London. Oh, in London. Okay. Excellent. So you have written a incredibly impressive tome on the history of interest rates and monetary systems. called the price of time. And my work on biophysical economics, how energy, money, growth, behavior, the environment

fit together. Interest and exponential compound interest is a really central part of it. So you are now a world-renowned scholar on this topic. And I hope we can spend the next hour or so taking a deep dive into humanity's history, present and future on the concept of interest. So Albert Einstein referred to compound interest as the eighth wonder of the world. Can you tell us what is the origin of interest? Well, I'm going to correct you to start with by saying that Albert Einstein never actually referred to interest. That was a comment, the interest being a wonder of the world, that

appeared in the mid-1920s in, I think in a sort of American insurance advertisement, perhaps in your neck of the woods, not Chicago or thereabouts. And like a lot of comments, either ascribe to Einstein to Keynes or to, who's the old baseball player? Mickey Mantle? Who has all the... Babe Ruth? No. Oh, Yogi Berra.

Yogi Berra. Yogi Berra. So Yogi Berra, Einstein and Keynes, if there are any sort of loose quotes hanging around, they normally get sort of distributed between one of those three people. But in that case, anyhow, Einstein never said it.

However, you know, compound interest is a wonder of the world, a pretty terrifying concept to behold. And people have been worrying. about the concept of compound interest. For millennia, we first find the notion of compound interest in Mesopotamian credit activities. And there's even the word for, the Assyrian word for interest is mash, which means the offspring of a goat, a kid goat.

but and compound interest is mash mash. See any word I can say in ancient Assyrian. Anyhow, and we see there was a dispute between two territories in ancient Mesopotamia over over some land which one of the one of the territories claimed. And the other the other territory then called Lagash demand. a back payment of rent, compounded over a long period of time at, I think, 33% a year. And the Lagash demanded of its neighbour the equivalent of 8 trillion litres of barley, which is several times more than the US annual barley output.

And you can see there the sheer impossibility of compound interest. And then by the 18th century, a fellow, an English sort of philosopher's statistician called Arthur Price made a calculation that if, I can't remember what it was, a sort of a gold coin had accrued interest since the time of our saviour to 1770. or thereabouts, that the size of the gold compounded would be twice the equivalent of twice the weight of the earth or the volume of the earth. And that's, that, that sort of critique of compound interest finds its way into, or the impossibility of compound interest, finds its way into socialist critiques of, of interest. So for instance, Karl Marx picked up prices piece on the impossibility of compounding. And as you're interested in energy and economic productivity and finance,

you're probably aware of Frederick Soddy, the Nobel Prize winner, the English Nobel Prize winner chemist who, I think you know better than I did. He got a Nobel Prize for the discovery. of radioactive isotopes or something. So Soddy got bored with chemistry and then became a sort of monetary crank in the 1920s. And he wrote a book. I can't quite remember.

It's called on the subject of what he called virtual wealth. And there he also describes the absolute impossibility of compounding, you know, compounding in a world of finite resources. what you're thinking about is how economic productivity is linked to the energy that sustains life on earth. And now, in a world of limited resources,

you can't have an infinite compounding. So I have numerous reflections based on your initial comments. My first is, I feel somewhat intimidated that I have to really up my game, on this podcast because of your articulate British accent, it makes me want to be smarter for some reason. So it's it's it's wonderful listening to you. My second thought is I wonder if positive interest is because we are biological creatures with finite lifespans. And so

there is like the title of your book, a price of time. And bearing on what you just said, though, our cognitive brains can understand that exponential growth and compound interest, like you said, the trillion leaders of barley and the virtual wealth that Saudi wrote about is an impossibility. But that's like a long-term thing. At the same time, our actual human steep discount rates that we can. about the present more than the future, wants stuff experiences consumption now. So the infeasibility of perpetual growth and exponential interest is someone else's problem, which is why we constantly recognize it and constantly kick the can forward. What are your thoughts on that? Well, first of all, I think, as you say, we humans do have, prefer the present

to the future and have a what's called a positive time preference. And this actually works to our advantage economically and financially, namely that, as I mentioned, as I take the title of my book, The Price of Time. If you put a price on time, you will use time more efficiently, and that price of time is also a price of risk. say you will take your risk more efficiently. And you will, and that's true whether you're investing in financial securities or whether you're actually engaging in actually sort of entrepreneurial activity.

So I think that humans mortality and the positive time preference actually contributes to our economic efficiency of using scale. resource as well. As for the compounding of interest, I think we have to take it with a pinch of salt. It's, you know, it's very easy for a mathematician to, you know, work out, you know, to create a simple formula and say, where if this compounds over X number of years, the amount of debt will be unpayable. And this is in a way the underlying thesis of Thomas Pickettys' capital in the 21st century, where he argues that if the rate of return is above the rate of growth, you're going to get rising inequality, this sort of compounding of wealth in the hands of a few. But it actually ignores

the fact that, as we all know, you can have, you know, most people have investments and if they're not Warren Buffett, they actually spend the money they receive. So there is actually no compounding of wealth over an infinite, you know, over an infinite period of time, but even over decades for, as I say, everyone apart from the extraordinary perverse Warren Buffett, whose main pleasure in life is to enjoy the compound. of his wealth by not spending it. But he's a one-off. Why is interest important or even a critical component to a healthy economy or a capitalist economy? You mentioned the efficiency of risk-taking. Could capitalism exist without interest? What are your thoughts on that? So I think, I'll take the question to a sort of meta level first and then get more specific. At a meta level, all our economic transactions take place across time. And we need something to guide those transactions.

Now, how are you going to balance your current savings with your future consumption? how you can if you have future consumption needs and you're making the investment what will the return on that investment be relative to the consumption you need to make in the future if you if we have if we have a certain amount of savings and a certain amount of demand for those savings what balances those to the demand and supply of savings at that level interest is necessary and and the Yale economic historian Bill Gertzman, I think he says that interest, he says that finance is like a time machine or a spaceship

that travels across time. And he then says that, and I think this is right, he says that discovery of interest is the most important discovery in the history of finance because it allows for intertemporal transactions, for transactions across time. And that is true for all societies, not just for a capitalist society.

Somewhere in my book, I cite an economic analysis of the Soviet Union by a Hungarian economist, whose name slips my mind at the moment. And now, he points out that the fact that the Soviet Union didn't have an interest rate, and they had, you know, they had a central bank that printed money and high levels of inflation, but they didn't have an interest rate to help coordinate economic activities. They relied instead on the central planner.

And the central planner, as we know, well, most of us know, the central planner will never have enough information to coordinate all the, all, all the information in an economy. So you need, I mean, it's common. Everyone, I think, understands that, and this is, you know, the critique of, of communism, is that they didn't have a price, a price of goods to, you know, the price of goods to allow for the supply and demand and for all the information contained within prices. But at a financial level, the most important price of all, what Jim Grant, my friend,

the financial historian and journalist calls the universal price, the most important price in the financial system, is the interest rate. And I think that's true for all economies, but I think it's specifically true of a capitalist economy. You can imagine, for instance, an agrarian economy, a feudal economy, sort of trundling along where, you know, someone is just, you know, farming and perhaps paying their dues to the landlord in kind, not requiring that much. interest, although bear in mind, as I mentioned before, in the agrarian economies of ancient Mesopotamia, they had interest, so that can't be a coincidence. But if we think of capitalism, what does capitalism, what do we mean by capitalism? Well, it drives its name from the word capital, and then we think, well, what is capital?

And capital is anything, any object, it doesn't even have to be an object, it can be a sort of a service or it can be something embedded in a piece of software. But anything that produces a stream of income over a period of time into the in the future. Didn't the origin of the word capital in your book you wrote it came from cows or something like that? Yeah, that's the Latin, caput, the head of cattle. And actually all these, the language for money, pecuniary in Latin, capital comes from capital of pecunae is a, I think a flock of geese. the ancient words for, I mentioned mash being a kid, goat in Greek, the word for interest is Tokos, which is a calf. So there's a link, if you're getting the picture, that the productivity of capital is linked to interest. And go back to what I was mentioning before, if you have an asset,

whatever it is that delivers a stream of income in the future, you need to put a present value on that asset because otherwise you can't buy it or sell it. I mean, how would you price a share if you didn't have interest? Because if it had an infinite stream of income, the share price without a discount rate would have an infinite value. And it's same true of a house. You couldn't have a housing market.

without a discount rate applied to the future income. So with a meta, big history arc, humans didn't need interest rates before the agricultural revolution because we didn't have possessions, we were hunter-gatherers, but with the dawn of surplus and accumulating and storing surplus and trading, in order to keep track and make sense of our world, we had to have a price on time. I think you're right. We obviously don't know what happens in a prehistoric period by definition. But once farming become settled, and once there is private property of some sort,

or at least property that people are laid, whether it's an official or an individual farm, that someone's laying claim to that property, if someone then wants to borrow that property and that property has the nature of being productive, then the lender is only going to lend that property in return for an interest payment. In other words, a share in the profit. And I think I mentioned in the book, they were doing that in the Midwest, in the United States, up until the beginning of the 20th century that people were lending cattle and taking the cattle back plus a calf at some stage in the future. That was the loan contract. So that type of agricultural

loan contract with interest has been around for four millennia or so. So I mentioned the role that interest pays as a discount rate in the valuation of assets. And that allows for financial markets and real estate markets and capital markets of all sorts to take place. I also mentioned sort of in passing that interest influences the nature of investment, real investment in the economy. So when we talk about when you're making an investment, you talk about a hurdle rate for the investment or a sometimes investors will think about the payback period. What's my payback period?

Well, the payback period embeds an interest in it. And one of the arguments in my book is that having a higher payback period actually helps with the allocation of capital from low return businesses. to high return businesses. And that actually, therefore, the interest rate or the existence of interest plays an important, you could, might even say fundamental role in Schumpeter's notion of creative destruction. And within that is a sort of, you know, notion of survival of the fittest. and bearing in mind that as the interest rate, when it becomes a hurdle rate, it will influence, you know, the type of investment activities people make.

And if they make, it's all well and good to make investments with very long-dated returns. But at a certain point, you will, you are likely to be misallocating capital and to be wasting money. And I think that's, you know, we're already seeing evidence of that, you know, in Silicon Valley, which was absolutely sort of inundated with capital in the last decade at the time when interest rates were zero and investors, you know, were crying out for potentially high return investments and the money went to Silicon Valley. And some of it was probably well spent, but a great deal of it was wasted in sort of pie in the sky scheme. So I think that's another absolutely vital function of interest for the capitalist system. Let me read you a quote from your book where you are quoting 19th century economist Irving Fisher. Nature is, to a great extent, reproductive. Growing crops and animals often make it possible to endow the future more richly than the present.

Man can obtain from the forest or the farm more. by wading than by premature cutting of trees or exhausting the soil. In other words, nature's productivity has a strong tendency to keep up the rate of interest. That makes sense to me in a pre-industrial sense, but now we are basing a financial and economic system not only on the interest that we get from the hydrological flows of the sun and the soil and the rain, but also the mining of non-renewable resources that we're depleting 10 million times faster than they were trickle-charged by daily photosynthesis in the form of coal, oil, natural gas, copper, other things.

So how do you see that disconnect of our monetary system is treating these non-renewable resources kind of as if they were interest when they really were drawing down, capital. Yeah, that's the point that my old boss, Jeremy Grantham, at GMO, often makes. I didn't know you knew him. I'm a big follower of his writings. Right. And I worked with Jeremy in the Asset Allocation Division. And Jeremy, you're probably also keen on Kenneth Bolding the economist. Well, Jeremy Light Society, a way refers to sort of spaceship earth, how can you have,

how can you think of having infinite growth in a, in the world of, on a finite planet. You're either a madman or an economist. Exactly. Now my, so I, yes,

Edward, I'm one of those guys, but go on. In principle, a low interest rate should be associated with a longer dated view of the future, if you think about sort of time preference, it's sort of lack of impatience. And in that case, then perhaps a low interest rate would be associated

with sort of allocating resources in a more sustainable way. However, one also then has to look at the evidence of the world around you and say that the low interest rate of recent years, actually doesn't appear to be associated with, you know, long-sightedness, but actually sort of extreme myopia. And I cite, and I think the best example of that is actually China, which I cite in the book that, you know, the, you all know this better than I do, but am I right in saying that sort of something like half of man-made carbon emissions have taken a place since the mid-1990s.

And the great bulk of the increase has come from China. And China has had, to my mind, you know, the greatest real estate boom in history. I mean, the valuation of Chinese real estate relative to GDP looks, you can't really tell because of Chinese needless to say, won't give you inaccurate data.

But it looks to be roughly on part valuation-wise with the Japanese real estate bubble economy of the 1980s. But that has been accompanied by an extraordinary building of residential real estate and also of infrastructure and funded with debt. at very low rates of interest. So I mention in passing in the book that actually the environmental catastrophe that China itself has unleashed in the last 20-odd years has been encouraged by these extraordinary low rates of interest.

Otherwise, at higher rates of interest, you wouldn't have had the credit growth and you wouldn't have had the investment boom. And bear in mind, you know, China's investment was running, at, you know, roughly 50% of GDP. The Chinese cement consumption, as you know, cement is very sort of production, conventional production of cement is very polluting. And yet, you know, Chinese cement consumption per capita

was, you know, over a ton per capita, roughly on par with where the Spanish got to when they had their crazy real estate boom prior to the global financial crisis. But Spain had a population of 30-odd million, and China's population was 1.3 billion. So that was a lot more cement and a lot more emissions. So here, this is our first conversation, Edward.

So you don't know a lot about my views, but here's my meta view on finance, bringing it back to what you just said. There's something in ecology. you mentioned before we hit record that you're studying how some of the things of Howard Odom. Howard Odom had a theory on the fourth law of thermodynamics, which he called the maximum power principle, which states that organisms and ecosystems in nature self-organized so as

to better degrade an energy gradient. In other words, energy is the currency of life. And it is true that in nature, a tree will grow the right amount of leaves not to be the most efficient or not to grow the most amount of leaves, but to have the right amount to access the amount of sunlight with all the shadings and everything else. I would argue that finance is a tool that humans use as a social contract to increase our cultural metabolism. to access energy in the same way that a tree grows the same amount of oak leaves. So just hypothetically, let's say that 50 years ago, debt was not introduced in a massive way globally. And for whatever reason, we humans had no access to debt.

Then as resources became more difficult to extract, we would have had to tighten our belts. We would have had to conserve and innovate with higher resource. prices. And, um, but instead we went a different route. We used finance as a way to turbocharge the size of our economies, our cement production, uh, the whole thing. And as you said, a long dated view of humanity and sustainability would have a higher interest rate, which would have acted as a, a dampening feedback on our consumption and growth. But in order to keep the mouth fed and keep our consumption going, we did the opposite. We had very, very low interest rates. As you write about in your book, this might be arguably the biggest bubble in the history of our

species because of what central banks have done. That was a mouthful. Do you have any reaction to that? Yeah. Well, I mean, when you mention the Howard Odom's idea of ecosystem extracting a range of to extract energy and how a, you know, a tree grows to an optimal height with resource limitations and gathering energy, well, from its leaves and so forth. Immediately it reminded me, as I mentioned in the book, I don't know when, you must have been to, you must go through New York from time to time. You see these little skinny towers and these skinny towers that sort of, almost touching the sky, these tiny little needles for billionaires.

And they strike me as being a tree that has grown too tall. Well, you think, you know, I went to talk about the misallocation of capital in recent years in, you know, VC. I mean, imagine that we, you know, on the one hand, you know, people worry about, about CO2 emissions. the next hand with venture capital funding space travel. I mean, you know, space tourism. It doesn't really make much sense. And go back to China and you see that China becomes a sort of wasteland

as large parts as it given over to building and then discharges go into the sea, creating these sort of dead zones there. And I, as I say, and bear in mind, actually, it now occurs to me that we talked earlier about Soviet Union. As you know, Soviet Union was the worst, as far as I understand, the worst polluter of all time. And I'm not saying that the absence of interest in the Soviet Union would directly

related. Oh, yes, probably not worse in terms of emissions, but worse in terms of, you know, just degrading your environment, you know, sort of, I mean, from what one reads, you know, sort of pools of crude oil lying around, you know. And it, if you, if the interest is a, it encourages scarcity and prudent use of resources and then actually a high interest will actually encourage and, you know, will get you closer or a higher. interest will get you closer to a more efficient extraction of economic output for the unit of energy. I mean, that's an idea. Can I say, Nate, there's one idea that, that I'm going to be interesting to hear your thoughts. I haven't really embedded it. I haven't put it in the book, which is namely this. If you, if one buys the sort of Howard Odom view that, that, that, that, you, you, if one buys the sort of Howard Odom view that, that, that,

all economic activity, you know, all economic growth, all economic activity results from transfers of energy and extraction and use of energy. And, you know, we can clearly see that, you know, over the sort of last 300 years, shift from, you know, what sort of coal-fired, industrial revolution in Britain, and then, you know, then oil and natural gas to the current day. We're now moving, regardless if even if you don't, even if carbon emissions are not your primary concern, there is a scarcity to those natural resources, in particular to oil. And oil gets, becomes more and more expensive over time to extract. You know, they, the, you can no longer just stick a, stick a, stick a, a, a, uh, a, a, uh, in Texas or in, or in Saudi and, and, and, and put. it out at almost no marginal cost.

And so that, if you take that view, then actually you could argue that the trend global trend rate of economic growth in the economy is naturally declining. And if that's the case, and if, this is sort of big if, if the interest rate were connected to the rate of economic activity, which is sort of some of argument, I'm sort of come, I'm half warmed that argument in my book, then you could say that this is an underlying that the rising cost of energy extraction or declining energy return on investment actually would be linked to a decline in interest rates. I didn't, I didn't actually put that in my book. Partly I think because I came to the whole Howard Odom thing, just as

I was coming to the end of the book, and I didn't seem to be able, I didn't know how I could integrate it. But I think it's an interesting thought. I might be curiously hear your thoughts on it, on that subject. I have a lot of thoughts on that. I think you're right that we are kicking the can of the, okay, so productivity, in my opinion, is a function of, innovation and technology combined with the massive energy surplus we get from fossil fuels, which the math of it works out to 500 billion human labor equivalents per year relative to five billion real humans and the mineral contributions. And we've taken those latter two things

for granted because we've always had more and it's generally been cheaper. But productivity growth peaked 50 years ago at exactly the early 70s when also oil production growth peaked. We still have positive productivity growth. It's growing every year, but it's growing at a declining amount. And what we're doing is we're trying to keep all the demographics and the various aspects of society fed and happy and stabilized by, stimulus checks by artificially low interest rates, by too big to fail guarantees. And so paradoxically, at a time when we should be getting biophysical signals of inflation and higher

interest cost, because resources are getting more scarce, we are not willing culturally or politically to admit that. So we're doing the opposite, kind of like we're solving a credit crisis with more credit sort of story. And we're reducing interest rates and guaranteeing other things and not allowing what you referred to early as the creative destruction. And in doing so, building a bigger bubble. Yeah. Now, I, well, think, think back to how the Europeans responded to Russia's invasion of Ukraine last year. Natural gas prices went through the roof. All these governments that are, you know, putatively committed to net zero 2050, or they say so-so. And yet the moment gas prices started to rise in the, I'm talking about natural gas prices

for home heating, started to rise in Europe, the governments then availed themselves of very cheap borrowing. And this was when, you know, the central banks hadn't really given up their quantitative easing projects, or at least were right at the end of the quantitative easings, and the cost of government debt remained very low, and the government were just going out and borrowing to subsidize not new energy production, but actually just to subsidize consumption as it stands. And that seemed to me, well, I mean, I can sympathize if a person has trouble heating their home, but for a societal basis.

You know, I got the subsidy. I didn't need it. It didn't make any sense at all. And actually, of course, what does it do? It prevents you from actually economizing in your energy use. There's another, I mean, you probably pick this up, and I probably mention it in passing in the book. But the very low interest rates, as you know,

encouraged a lot of venture, a lot of venture capital or V or, high-yield investment in high-yield debt investment into these US fracking and the shale. And that those were, and perhaps you have a different view, but it seemed to me that those were businesses that didn't actually generate the amount of return required to keep living business, which is why firms like Chesapeed went bust. But they did, in the near term, give you a little boost of extra. oil production at an uneconomic cost that kept people, that kept a lid on oil prices in the near term. Yeah, I totally agree.

It's so interesting to unpack this in real time with you because we don't know each other. And I didn't know that you knew about the term energy return on investment. I wrote my PhD on that topic, you know, 15 years ago. So in the beginning of your book... By the way, Nate, I did a podcast the other day with this guy called Paul Chapman. Does that mean? So he does podcasts about commodities and so on. He was, anyhow, he's been pursuing that sort of ear, interviewing people on this sort of E.

Roy. Oh, don't get me started on EROI. I think it is a fantastic concept concept conceptually that we can create money, but we can't create energy, and the energy has a cost in biophysical terms, not in dollar terms. But to try and make decisions on it and use it as a fine laser digit that a 10 to 1 EROI is better than an A to 1, it's fraught with peril in my experience. Because a lot of judgment goes into the comparative estimations that you use on defining things, yes. Yes, so I hear there is a lot of debate, isn't there, going on between what's the

erie of wind, of, you know, of onshore wind, offshore wind, solar panels versus the erie of your conventional or, you know, and I think, you know, depending on which way you lead, you can come up with, you know, give me the erie you're looking for, or is that, is that unfair? Exactly. That's exactly right. But here's why it's important is because our society and our institutions and our cultural stories and our expectations were built on something like a 20 to 1 year oi or higher in aggregate. So friends of mine who are experts in this think that the inflation rate, setting aside central banks for the moment, the inflation rate of a society should be one over the EROI. So if the euroi is 20, then inflation should be 5% a year. And as EROI declines from 20 to 15 or down to 10, the inflation will go up because there is

harder access to get copper and oil and things like that. Of course, that's not what happens in reality because by decree central banks declare what the interest rates are. So that is the huge gauntlet that I think we're facing now, the biophysical gauntlet of energy and resources are telling us one thing. And interest rates and money are telling us another thing. And we're headed for a giant reckoning between those. Now, I mean, I'd say, I mean, a couple of thoughts. One is something I took away from Odom, where he talks of, um,

inflation, if you remember, being the decline in the value of money relative to a unit of energy. So I suppose because if you think about it, money allows you to, because it can be translated to things that produce energy, it actually allows you to sort of transfer energy. So I can see if you have too much money relative to a declining eroy. or a declining source of surplus, then the, then you'll get to get inflation. The other thought,

I think, and why I said earlier, I only gave a sort of qualified approval to the notion that interest is linked to economic productivity. Because you see in the ancient world, and this is pointed out in the great book by Sydney Homer and Dick Silla,

history of interest rates, which goes back at the same time period as my book, back to Mesopotamia. And what they describe is these sort of U-shaped, did you pick that up in the book? I think I included a chart in my book from Homer and Silla. You-shaped interest rates over time. So whether it's in Mesopotamia, in Greece or in Rome, that each time civilization goes into decline, as it reaches a late stage,

interest rates are very low. And as the civilization starts to decline, then interest rates start going through the roof. So, and that sort of, you could see that would make sense, because as a society is collapsing. Could it be because of,

could it be because of the lack of trust suddenly? What is the role of trust than interest rates? It could also be greater risk, It also could be to do, and the risk might also include debasement of the currencies or inflation that tends to take place as societies collapse. And it could also be linked to the scarcity of resources. So in fact, on the one hand, you might say that the interest rate is linked to our productivity, but also it's linked to the scarcity of resources. So if you have a society that's collapsing, then resources become more scarce. become more scarce. If you want to borrow my

my sheep or if you want some grain from me to carry on for me, I'm going to charge you more because it's no longer as abundant as it was before. I now have to pay you about triple mash. Mash, mash, mash. Yes, something like that.

So that's not a good foreboding, Edward, that you said that historically there are U-shaped interest rates and right at the time of civilization upheaval, interest rates are very low. What does the concept of massive, a few years ago, massive up to $16 or $17 trillion worth of negative interest rates in Europe? That's no longer the case now, but under what biophysical scenario does a negative interest rate

makes sense other than speculation? and the momentum of central banks' past decisions. Well, I don't, I mean, if interest is the price of time, a negative interest is putting a negative price on time. It's turning the clock backwards. And so you had, you know, in Europe, you had, you had a sort of Alice in Wonderland world. I mentioned so, you know, that you could actually buy,

30-year, let's say, Swiss government bonds with negative yields in the expectation of capital gains because rates were still continuing to get back. You were buying negative yielding bonds for capital gains and holding conventional stocks for income. I mean, how crazy does that sound? No one caring about yields, the fact that in Europe, not only were companies able to, normal companies able to borrowed negative rates. Junk bond rated companies borrowed a negative rates. So there was no pricing of risk. And there is another, I mean, this is linked to the negative rates,

but at a point that Bill Gross, you know, ex-Pimco, the so-called the old Bomb King made, he said, you know, he says, he said, he was saying, you know, roughly 10, 12 years ago, these very low rates don't make any sense at all because a healthy banking system needs positive carry and by getting rid of the positive carry in the banking system and in the financial system at all or at least putting the carry down to very low levels in which someone's taking on a huge amount of duration risk or interest rate risk by buying a long-dated bond

you're building up a huge amount of risk in the system. So I think, you know, I think that these negative rates and the ultra-low rates are, to my mind, their end product was the sort of the COVID market mania of 2020 to 2021, which Warren Buffett's sidekick Charlie Munger said was the craziest financial markets in all of history. I don't know how much history Charlie Munger knows. He's been around for a while. But I mean, I think that's, you know, I've read quite a lot of financial history. And I can't think of any markets in aggregate that were quite as crazy as what we saw in the last, you know, ending at the beginning of last year.

Well, you stay tuned for 2024 and 2025. So in your book, you have a chart at the very beginning. I don't know that the screen can see this, but we'll share it. that shows 5,000 years of interest rates. And with the exception of the very beginning, which is 3,000 BC, the highest and the lowest interest rates have been in the last 40 years. What is up with that? Actually, how's it, the highest would have been, I think,

I mean, the two several countries compete for highest rates. I think Germany had very high rates right at the end of its hyperinflation. I think that Brazil and Argentina in their hyperinflations, they had very high rates. So clearly, and now you're not going to get a hyperinflation without a paper currency. And so clearly the very high rates are linked to the arrival of Fiat currencies and high inflations. And then the very low rates also linked to the Fiat currencies, that once you move into a world of fiat currencies, then the central banks have a much greater, say, determinant of what the interest can be. There's no, there's no, I mean, they used to talk about

the so-called zero lower bound, and then they discovered actually, hey, we can take interest rates below zero. So you would never have, in a world in which, you know, the units of money were restricted, by some hard rules, such as under the gold standard, you're going to have much more, much more restricted movements in interest. And in fact, under the gold standard, what you see interestingly is you had very stable long-term rates and very volatile short-term rates.

And the volatility of the short-term rates was necessary in order for the central bank to make sure that it kept enough gold bullion in its reserves to cover its note issuance. Now, once you move into the Fiat money era, we get the sort of opposite. We get more stable short-term rates because central bankers don't like, they don't like, you know, economic downturns, whatever. But the net result is much more volatile long-term rates. And so again, that's not, you know, a particularly comforting forward because if in the 20th century we saw the lowest interest rates ever and the highest and the 21st century we've seen the lowest in history so the question then would be do you then make a step

you know at some stage to even higher than we've seen in before i don't know so you also wrote a very popular financial book called devil take the hide most which was about uh historical financial manias let me ask you this edward at all of these historical financial manias, people in power were delusional about the risk. Either they were delusional or they were helpless to the momentum of what was going on in the day. How is this time any different? I mean, you look at the Bank of Japan now has bought 50% of the government of Japan's government bonds. how, I mean, how big of a bubble are we in and how disconnected from reality are the central

bankers and the people in charge? Or are they cognizant of the risks that we're discussing, but they're just powerless to avoid, you know, turning the heat on for people and getting food delivered, et cetera? Well, I'd go back to the historical manias. as I point out in Devil Take the Highmost, it's not just that, you know, the manias tended to take place with the active connivance

of the political authorities, who it were often sharing in the games. The classic case was the South Sea bubble in which the took place in Britain in 1720, which the company, which was run by these crooked people, the sort of Sam Bankman-Frieds of its day, they actually just bribed members of parliament.

They bribed the king of England in order to get their scheme off the ground. And you see that right through to the Japan's bubble economy in which politicians are involved. I think in the recent years, I think the very low interest rates and the sort of illusory wealth that they've created, the virtual wealth, suits the politicians absolutely fine because the politicians have a, you know, have extremely short time horizons, whatever they say. And so actually the very low interest rates help, you know, as we used to say, kick the can of various problems down the road. if you have incipient pension problem you know if you have a society with inadequate savings then the easiest way to deal with the inadequate savings is to inflate the acids of what saving has taken place which you know what's happened in america i mean i did i didn't mention in the book but i did crunch the numbers a few years back and what you find is that in the u.s uh a u. household wealth as measured by the Fed used to move in line with US net savings. Sort of would make sense, you know, you save and it becomes a piece of wealth. But then over the last 30, 40 years,

it's diverged. So we have the less we save, the more the interest rates went down and the more actually the valuation of what assets we had rose. So in fact, you had an inverse relationship between wealth and savings, to me, almost a definition of a bubble. And, you know, that suits the politicians very well. Do the central bankers understand it? I don't think, I think their problem is cognitive. I think that they just, they have models that don't describe the world. And they have, I think, you know, my, I suppose my view and my background is a historian

before going into banking and investment. But my view is that the central bankers, many of whom are drawn from the ranks of physicists and mathematicians, have no real understanding of actually what an economy or a financial system is. Their understanding is limited to models that do not in any way describe the nature of the complex economic system. system that we have. And that would explain why, you know, think of it over the last, you know, 30 years. I mean, look at the epic mistakes the central banks made. They, they, they, they didn't see or understand

that the dot-com bubble. They didn't understand the credit boom at all. They just said, hey, you know, with the dot-com bubble, they said, hmm, you know, we live in a world of efficient markets. Who are we to say that this is a bubble? With the credit bubble, they said, oh, well, one, one, person's debt is another person's asset. Hey, who cares whether, you know, debts and assets are rising in tandem. Give me, you know, and then when you, when you've got the low interest rates, they said, well, these are to do with, you know, declining population or something in the real world. We've got nothing to do with that. I mean, you know, even as they were actually going about deliberately manipulating short and long-term rates to levels that had never been seen before,

then you get to the position, I'm ranting now, but then you get a position of the inflation, which they unleash, where once again they fail to see it and constantly fail to acknowledge their responsibility for. So I mean, I think that the central bankers as a community as a whole are, you know, a exhibit sort of group think and a failure to actually analyze in a modest way, recognizing, you know, one's own, you know, one's own with humility, the complex nature of the system and the impact that their actions are having on this complex system. I fully agree with that, but it's almost too late in the game, because if they really did understand the risks, I think, I mean, what is the way out? We're being squeezed by both directions here, by energy and research. resource depletion by geopolitics, by declining real productivity. And look at what happened with the Fed raises in the last 12 months.

All of the bonds on bank portfolios, you know, they have paper losses on those things, especially in Europe if they own negative yielding debt. In 2011, Edward, I met with one of the voting members. at the time of the FOMC talking about these things. And he said, we have models that look at 2% growth in the future. And then we have quarter percent variations up and down from that. And I said, well, what if growth in the future is zero? I didn't even say negative.

I just said zero. And he had like this blank stare. And he's like, well, that would be bad. So I think they just implicitly assume that the animal spirits, of productivity and human ingenuity will eventually, uh, continue to grow. Uh, and if we grow, we can pay back our debts and, and things like that. So I, I personally have come to the conclusion, uh, which is one of the reasons I liked your book so much. I, I do think we're living in the greatest bubble of, of our history. And we are making the bubble bigger by not acknowledging

the bubble. Um, do you, do you agree with? me? What do you think? Yeah, I mean, so that's part of, you know, go back to what I was saying earlier about the interest as the discount rate. Well, you know, if you take the discount rate down to its lowest level ever, you're going to inflate the valuations. And what we got was the so-called everything bubble, a bubble in everything. And you can see that, you know, going back to what I was mentioning before, the Fed's U.S. household wealth and U.S. household net wealth is far above its long-term average, I think, sort of round, I'm saying off the top of my head, around 150% of GDP above its long-term average. And that bubble in wealth seems to, as I mentioned earlier,

seems to be inversely related to the decline in interest rates. And in fact, every time the central banks have met a crisis, whether dot com or Lehman and so on, each time, as you know, they've taken interest rates down to a lower level and we've had a bigger bubble following it. And I think now, yes, we're at the highest level of net wealth. I looked at the recent data for published, for this year. And that's come off, you know, really hardly at all, you know, despite the big sell-off

in the markets last year. So if you're going to get mean reversion, I'm not saying you will, but if you're going to get mean reversion, then you've got a lot more wealth to to evaporate. And as I say in the book, you know, a definition of a bubble economy is an economy that is dependent on the bubble. And so, because all these income streams are related to the bubble. You and I have worked in finance. Obviously, our incomes at the time were dependent on how much, you know, market activity was going, you know, how much financial market activity in, you know, investment banking

or what the valuations of markets were. So if you're in finance, which in the US and UK have grown to much higher levels of national, income than in the past. Your income is a derivative of the bubble valuation. And then when you end the bubble, you have to have a massive reallocation of resources. It's probably a good thing, but it doesn't take place overnight, and it's not very easy. And there are obviously huge amounts of vested interests in keeping the bubble inflated as long as possible. So the last big bubble that burst was the 1929 to mid-30s credit collapse in the U.S. and in Europe. But after that, we had 40 or 50 years of growing oil production still ahead of us.

This bubble, that is not the case with resources. So how do you see this all unfolding either in the short term with this Silicon Valley Credit Suisse current banking crisis or this decade with this larger bubble. Are we going to have hyperinflation or deflation? Will we switch from a 2009 situation of a too big to fail and find that we're going to be in a situation of too big to save like France or Japan or something like that? What are your speculations on all that? Well, first of all, the thesis of the book was that these ultra-low rates had got into all the cracks of the financial system and of the economy, and that therefore the system would be

extremely resilient, so seemingly fragile or non-resilient to any interest rate, right? And that's what we've seen over the last year, you know, the market selling off. And then we had the UK pension funds almost going bust. And then we had, you know, the cryptos, you know, I mean, I know it's the sort of laughable side show, but you have the sort of crypto winter. And then more seriously, you have the problems in the, in the regional banks with Silicon Valley Bank going under. And there, you know, as I point out to in the book, the ultra low.

rates created a huge amount of duration risk or asset sensitivity of market sensitivity to changes in interest rates. And I and I and in a way all the problems we've seen to date are linked to this duration risk or interest rate risk. And I think slowly there's you know the policy making world which appeared to have been oblivious. As you know in the investment world, people have been talking about this for years. But I noticed that this week, the IMF chief said, you know, oh, the world faces central banks should go, should be careful what they do. There are a lot of risks out there.

There's a lot of interest rate risk. So that's one point is I would expect if the central banks continue raising, you will uncover more problems in more different areas. And you won't necessarily know where they are. But, you know, my own view is, you know, it's not my job. to analyze the entire world, but to give people a framework to start analyzing their own areas. I think one of the problems that once you realize that the question of the sensitivity of the system to interest rate hikes, which is an inherently deflationary impact, is that the central banks will then become reluctant to tighten,

or they've lost, they're not, I mean, I think they already are. They won't admit it, but you can see that, you know, that interest rates are massively negative in real terms, and have been over the last couple of years. And if you can't use the interest rate lever to control inflation, and let's just assume that, you know, governments will continue to be fiscally profligate, then you're going to, then you're actually in danger of,

having much stronger inflation. And then there's another problem to think about, which is that the central banks, they're not just having an incentive to keep interest rates low, but they're already going back to use their balance sheets to support tottering financial institutions. So the Bank of England came out to, you know, to help to step into the UK Guilt's market, to buy GILTS when the pension funds were going bust. then, you know, now the Fed is offering, I mean, offering this financing to the US banking whereby they're taking the collateral at, I think they're taking it at par value rather than

a market price. I can hand over to you $80 million of market price of collateral and get $100 million back from the Fed. So the Fed is then taking on more, the central banks are taking on potentially, more. more security risks on their portfolios at a time when they're already losing money on their portfolios. This is what I meant by Too Big to Save is the central banks of the world are acting kind of like leverage bond funds in cahoots with the governments that they're associated with.

But how does that end? Well, I mean, so people are very, people are very blithe about central banks. not having negative equity. The Reserve Bank of Australia has also, has already announced that its equity has formerly been wiped out. The Bank of England, which has an indemnity from the UK Treasury for its asset purchases,

its quantitative easing asset purchase, it recently sent to Her Majesty's Treasury a note saying, well, if we were to run off our securities under such a scenario, we may have losses of 200 billion pounds, which we expect to be indemnified for. Well, that's actually quite a lot of money. I mean, it's roughly, it's not quite as much as the government spent on the COVID policies, but it's, you know, in the, in that region. So either you get a situation where, as far as I see it, the central banks just, invert,

commerce, print money to or operate with negative equity. But there's a situation where they, if they're printing the money to make good, their shortfall, then that would seem to be inflationary, or the taxpayer has to make good, which actually would be hugely painful. And the one other point I'd make, nature, is. that over the last, I mentioned to you these very ever lower rates to keep the bubble afloat over a 30 year period from the dot-com bust. You know, really from the LTCM hedge fund bust in the early fall of 98, each time rates have

been brought lower, got a bubble, then we brought it lower. So the bubble requires ever lower interest rates. It is not just enough to say, okay, we're not going to be as high as we would have been. We're going to have to have lower interest rates because you have to inflate the bubble to give people the wealth that their savings and the returns on those investments won't have. You have to, the economy is in the bubble economy. It's hooked on capital gains. And you can only produce those capital gains by ever lose some monetary policy.

Now, I don't think that, so I think that, yeah, I think I don't know exactly what's going to happen next, but I, you know, I don't think over the next five years, you know, we're going, you know, it's going to be smooth sailing for sure. Well, yeah. So one other point that we didn't talk about, well, there's a lot of points we didn't talk about. But if you look at the increased duration risk because of the raising of interest rates, that's a problem, right, for the viability of the financial system. But also. the amount of government debt, like the United States is now over $32 trillion in debt, and that's fine if we're paying 1% interest. But if we pay 5% or 7%, some historical average interest rate, we're going to be paying so much of our annual income on debt service that it will be untenable. So that's another reason that we want to have low interest rates. But let me ask you this.

I agree with you. I think we will, the default path is we will quote unquote print money to kick the can further. You're a financial historian. Are there any examples in history that come to mind of a similar tenor where people got austerity and realize this? And instead of printing money, they actually took the economic pain, had the creative destruction go on, and then that, you know, they came through that and had some other options. Or does it always end with print until something implodes in the culture? I was thinking, actually, I'm reviewing a new book on inflation.

I was thinking about, you know, when does inflation come about? And when does it not? And actually, it's curious. So, for instance, in the U.S. during the Civil War period the Union was issuing these greenbacks, greenbacks were depreciated in value. But then after the war,

they actually retired the greenbacks at their old power value. So in other words, you know, the Washington actually decided to, to, you know,

to read, to make good on the, on the, on the dollar. Now, it's also true after the, in the, Napoleonic wars, Britain had ran up a huge amount of debt to fight Napoleon and the gold conversion

of banknotes was suspended and after war they actually brought back the banknotes to par with gold and restored convertibility. After the first World War, Britain actually, again, having gone off the gold standard, did actually go back onto the gold standard at its end. all power, admittedly creating quite deep problems. And I'm thinking, okay, so that's one set of problems where, cases where these countries actually didn't go down the sort of default or the inflation route. But then the other cases, after the First World War, you had, you know, hyperinflations in Austria, in Hungary, in Germany.

And so what are the difference? It's like the victors, the victors actually can hold on to their currencies and will actually take great, great, make great efforts. And the, whereas the demoralized countries that have been defeated, whose societies are fractured and whose economies are weak are more likely to take the inflationary. root or even the hyperinflation hyperinflation so you have to I mean we're not fighting a war but you have to think are we are we a winner or are

we a loser I would argue that we are fighting a war we are fighting a war right now I mean we're we're making the biophysical phase shift from both from a unipolar to a multipolar world with Russia and China

and others having a say and also I think the Ukraine war was kind of a shot across the bow from the narrative of money and technology our powering society to resources, particularly energy, are really important. Russia and Saudi Arabia together account for 45% of world oil exports. That oil is that's available for purchase. And so I do think that war and geopolitics are also part of this story that that you're telling.

So from a monetary perspective, given all of your readings of history, what sort of broad guidelines, I'm not asking for an antidote to the current bubble, because that would be too large of a question. But what sort of broad guidelines might you offer from a historian's perspective on a more durable, stable monetary system in the future? Well, I'm glad you didn't ask me how we would get out of this current Ampas because I think that's... That's too big of a question, I know.

Yeah, yeah, but I'm thinking, I have been thinking. I think we need a new type of monetary unit. I'm not saying to go back to the gold standard, but this, you know, this fiat currency that we've been playing around with, you know, for the last 50 years, since the collapse of Bretton Woods, it's associated with, you know, initially a period of very high inflation

and then these series of asset price bubbles and financial crises. And I think we need to move, and as I mentioned, as we've constantly talked about, it's also associated with us handing to a committee of people at the central banks a power or control over the most important price

in the economy, the price of time, the interest rate. And no, no, no, no, and we can, we can laugh at the, you know, ridicule or pull our hair out at the, what the central bank's done. But, you know, no individual, they've been handed an impossible task. And so I think we have to, at some stage, get back to a world in which a monetary unit that cannot just be increased at will, whether by a central bank or a commercial bank. And we probably need to deal with the leverage of a fractional reserve banking system, which, you know, from, well, from, I don't know, from time immemorial fractional reserve banking is a city has its own, has its own weaknesses, you have too much leverage and you have an asset liability mismatch,

which is what happened to Silicon Valley Bank. And the answer, you know, we can design a financial system that in which, you know, the banks actually don't take leverage. The deposits are not levered into long-dated loans. And I think we'll have to go down that system once we've got rid of the current mess. And there is a future in that for FinTech, if you want. There is a future in that for banks going much closer to what's called the Chicago model, where they simply own short-dated government debt to cover their liabilities. And then the credit activities can take place out of the banking system

and not to be, but in which the losses are contained. And in which in such a world, if you limit the growth of the core money, you should then get an interest rate which more closely matches the savings, the actual savings, and actual demand for savings in an economy. And therefore, I don't know if there is such a thing as a natural rate,

but you can see that there is a rate of interest which isn't that manipulated. If you went back to a world, so to speak, where the currency is hard in a way it isn't today. I agree with that, and it's an incredibly complex question. I wrote a paper like 10 years ago that referenced the annual interest of forests that grow is 2.8% to the volume of the forest grow at 2.8% a year. That's what can be sustainably. I'd like to see that.

I'd like to see that. I'd like to see that paper. I mentioned, didn't I? Karl Marx sort of teases, refers to the tree theory of interest. There was a German, is he called Art? A, R-N-D or something like that, a German economist of the 19th century who said, he said the interest arrives from nature and is linked to the annual growth rate of trees. But we're subsidizing that with all kinds of things that are one-time endowments.

I refer to it as the carbon pulse, which is now starting to, you know, starting to, very soon to decline. Still very, very powerful. And the amount of, of wealth that we get from that dwarfs the 2.8% interest on forest growth. So I agree with you that in the future, there's got to be some, there's two questions. How do we navigate the current bubble without destroying society? That is its own problem. And then what is a more sustainable monetary system for future humans. And I think that second question, there has to be some biophysical tether

to land, land productivity, energy, something. Because to run the world kind of like a casino or a leverage bond fund and when you get in trouble, you double down and leverage more is a recipe for disaster. Yeah, I think the

high act, the Austrian economist, and actually I think Ben Greer, the securities analysis, they both, you probably know this, they both, as far as I can remember, suggested a currency reform in the 1930s of a commodity-based currency. And I mean, as for having land as a basis for a banking system, that was actually the original idea of John Law, who adapted it slightly to create the Mississippi bubble. So the trouble is if you create credit on land, then you actually can have a sort of, you've created a perfect bubble machine. So you have to be careful of what sort of limitations you put in.

Well, let me ask this then. Forget about all the details. Is the creation of bubbles itself part of our human genome? Possibly. I think we would probably have. bubbles if it weren't for monetary excess because you know people can get excited about things and because particularly you know new technologies have first mover advantages that and and excess returns you know like Microsoft did in the 80s and 90s that got the

whole sort of tech tech bubble and dot combe boom going so I think and and that's not necessarily a bad thing sort of in which you have a period in which people are thrashing around for what are all the myriad opportunities available to us. I think the trouble is that when it's underwritten by an easy money policy, it goes way too far. And then what we've done in the last 25 years or so is we sort of, I'm just repeating myself, but we pushed ourselves further and further off course. So I think that having Silicon Valley come up with some ideas, and it doesn't really matter if nine out of ten ideas fail,

if one idea is a good one. But if you have too much money going to Silicon Valley, you have a massive waste of resources. Do you think that between now and the eventual popping of this bubble, that central bank digital currencies will be a reality so that governments can control. Maybe they even would have your currency, have an 18-month expiry date.

You have to go spend this before it expires in order to boost aggregate demand. What do you think about that possibility? Well, you know, we lovers of freedom are quite worried about the potential for CBDCs because, you know, if the central bank can look into every one of your transactions and cut you off when you're doing something that is not sort of socially approved.

And as you say, actually even threatened to take your money away if you don't spend it, which is just returning to negative interest rates. It's a massive expansion of the state into people's personal lives. And it's, and to my mind, you know, yeah, I mean, people have referred to a seat, CBDC is a digital panoptican, the panopticum being the prison designed by Jeremy Bentham, in which an individual prison guards standing at the top could observe every action within the prison. So I think that that would be, and I think that's where China seems to be going pretty fast, and that would be very worrying if our central banks and politicians would go down that route.

I was talking to a friend of mine the other day who sits in the British Parliament. He says that the Bank of England is pushing through on its CBDC plans without any parliamentary scrutiny, which I think is extraordinary, that if money is a sort of power in a society and the CBDC gives you the greatest power that has ever been known to man, that you should hand all that power to a bunch of people who have so conspicuously failed in recent years without any oversight is, you know, extremely worrying. Having said that, if you are well-designed the CBDC, backed by government debt, so it wasn't, didn't just conjured out of the air, could be a sort of hard money. And when I say well-designed, that would mean that it could only increase by, you know, three or four percent a year. And that you can see that would, you know, that would sort of take the world of the Chicago plan, fully backed money into the digital sphere. It would be hell, a nightmare for the commercial banks because they would lose all their deposits to it.

because who would want to keep their money at Silicon Valley Bank or whatever when you can keep it on a central bank app that much more easily. But I mean, for me, all the convenience of those functions would be more than outweighed by the loss of privacy if a central bank could have complete control over it. And obviously, we've gone through sort of, you know, a number of unprecedented restrictions and our liberties in recent years. So I think that's probably something one, you know, one wants to lose a bit of sleepover. We've covered a lot, but at the same time, we've really only scratched the surface.

I don't think people understand, I think followers of this podcast understand the centrality of energy and resources and the environment to our lives. but we take for granted the price of time, which is the price of money in our global economy. If you have a few minutes left, I'd like to ask you some personal questions that I ask all my guests, just a few of them. Given your lifetime of, well, scholarship on finance and financial issues and your recognition that we're living through this incredible Wiley Coyote financial bubble, Do you have any personal advice to the viewers of this program at this time of kind of a pending global economic crisis?

Well, from an investment perspective, from what we've been discussing, it seems to me to make sense to consider the inflation proofing of your investment. And one of the things you must have picked this up on reading Howard Odom, that gold actually has an extraordinary high innate energy content. And in a way, Bitcoin, so digital gold has a sort of fabricated energy content, completely wasting resources. So it makes me feel quite, you know, feeling that one wants to hold gold in the current environment. environment, a sort of ballast to the portfolio. And gold wasn't doing particularly well last year in dollar terms when the dollar was strong,

but seems to be coming back. So that, and then I think that, I mean, you probably have stronger views on that than I do on this. It seems to me that the energy transition is people that, you know, haven't, I mean, I can't believe it, but the policy makers seem to make commitments that, that five minutes. of analysis would tell you are impossible to meet, in which case I think that conventional energy is, you know, remain, which has done well in the last couple of years, you know, will, is required and will, you know, will deliver, as it's done over last year or so, decent returns beating the market. And I think that probably holds true for a,

a broadway of raw materials because of low investment in recent years. So there is this, you know, during the German hyperinflation, there was a saying that people, there was what they called a, a fluked indie Zachverton, a flight into things of real value. So we've been living in a world in which things of virtue, you know, that we've ascribed value to objects that are purely virtual, such as, you know, your cryptocurrencies or your non-fundurable tokens or rubbishy works of contemporary art. And the, you want to position, to my mind, portfolios in assets of real value.

And if you can also assets, you know, that are. robust to questions of inflation or rising interest rates and so forth. And I also, I'm going back, I, you know, I got, I think that, you know, now that the Treasury inflation protected securities have a positive yield, that's, you know, that makes them more attractive from an investment perspective, notwithstanding the fact that the governments will be very low to pay you the, pay you the, if inflation runs. out of control. But there's, I think, you know, I'd stay clear of all nominal assets really and all purely

financial assets, but that's my own preference. So I'm sure we do have investors and speculators and asset allocators listening to this show, but most people are pro-social thinking about themselves and their communities in this time ahead of what I refer to as the great sympathies. simplification. Investments aside, do you have any personal advice on how to cope or prepare in these times? Well, I always think, you know, it helps live quite modestly. I mean, for years, I just tell my wife, you know, whatever you think you're worth, cut it in half and live off that. So, in other words, don't, don't overstretch yourself and lead, you know,

and, you know, lead a simpler life as possible. And in a way, you know, one can lead a reasonably good. And I'm living in the country. I think I've seen anyone for four days. So you can lead quite a comfortable life. And quite, and I haven't spent any money. You know, it's not, I just, you know, I think it's shoe extravagance and luxury. And I do think, I think, I suppose, you know, this is why.

what I've done myself, I was brought up in the country, but I think that life will be easier in the country than in cities going forward in the difficult times ahead. I think back to the hyperinflation where the poor wretched Germans, you know, starving in these cities in Berlin or whatever, they would go out in the middle of the night and steal the turnip, they would walk 50 miles to steal turnips from the farmer's field. I'm not saying we're there, But the point is that you want, you know, there is actually a certain value in having a sort of sustainable, you know, and quiet life and a rural life. I mean, after this conversation, I'm going to go off and plant my vegetable seats. So we better, we better wrap up shortly. Otherwise, the day will be done. Yeah, we better, we better wrap up shortly. You could never guess what I'm going to do after this conversation. I am going to get in my car.

No, I did that before this conversation. I'm going to rush down to the post office box where my 25 one-day-old chickens have been FedExed to me. And I got a call this morning and I have to go get them. And it's 18 degrees here, Fahrenheit. And I have to immediately put them under a heat lamp. So it's my new chicken flock for this year. So another reason I'm wanting to watch the clock. I hope you know that chickens attract rats.

As long as you're prepared for rats. We have a huge rat problem. Not to give too much information, but my last crop of chicken babies, the rats got like a third of them. They ate through the plywood. So now I bought some spray foam to cover the holes that is unappealing to mice and rats. So, yeah, too much information, but I agree with you on the rural existence. Do you have any recommendations to young humans that are learning about energy and the economy and Bitcoin and interest rates and the world that they're inheriting with climate change and everything else? Do you have any recommendations to young people?

Well, I mean, I think if they're listening to you, they're listening to you, they're, on the right lines. I spent the first, you know, decades of my world thinking about finance and economics without taking on board energy and the role of energy. And the more I think about it, the more important it is. And so I think that, yeah, I think listening to your podcast is probably quite a good thing. I think one of the things I find nowadays is possibly among the younger people. I mean, not actually in my own family or among my splendid family, but one hears that younger people are less tolerant of argument and debate and perhaps prone to fixate on ideas that are quite, you know, scary and therefore get a bit hysterical.

And look, we've had been in a way, we've been, you know, obviously a lot of thrust of our conversation has been. worrying about the state of the financial system. However, you know, I think that one needs to keep an open mind. And one needs to, you know, you cannot make any type of intellectual advance. Or you can't even really hold a decent view in your head unless you're prepared to be skeptical. You can be skeptical of everything we've said. And that's absolutely fine.

I mean, it's a loss of skepticism in the current environment that really, and that, you know, Obviously, one finds it a bit, you know, among the young and all these sort of hypercharged, you know, ridiculous debates, which you already have mentioned because you get head chopped off. The, you need to be open-minded and skeptical. And I think also, I mean, again, I'm plugging a case of being one of the ways of being open-minded is to read history. I mean, if you read history, then you see, hey, you know, as Jim Grant says, a man keeps on. stepping on the same on the same fork. So we keep on making the same mistakes. And our behavior in the past has obviously not been quite exemplary.

And we can see similar patterns. And in a way, that should also give you hope. Because however crazed we are today, both in our society and in our finance, some or other, there is an end point, you know. And at an end point, there is a regeneration. And history, you know, history is in a way easier to deal with because it's past and therefore you don't have to live the pain or worry about the future. So I think, as I say, skepticism and some sort of historical balance is probably, I think, most vital today.

Otherwise, you'll lose your sanity. I like that answer. And in a subsequent email, I will ask you to recommend five or ten of your best history recommendation books. And I'll put those in the show notes for. for people to to check out. So we just met on this conversation. So hopefully this won't be too personal, but I'm just curious, you know,

knowing all this, living in the countryside in England, what do you care most about in the world, Edward? Well, I tell my wife it's my dog, but I'm really just teasing her, aren't I? Not so much. I think the dogs would be pretty high. Dog and wife. I'm a wife and dog man at heart.

Okay. Excellent. I have four dogs, and they are very close to my heart. Second to last question, sir, if you could wave a magic wand and there was no personal recourse to your actions, what is one thing that you would do to improve human and planetary futures? Well, I suppose given what we're talking about, is I would like to, I'm surely everyone gets the same answer given where we are today, that you'd like a source of energy that was plentiful and non-polluting. But in my field, going back to what we were saying earlier, I would like, I would like, I think I would like a monetary. a form of money that couldn't be manipulated like the paper money is and that therefore would be would give us more stability financial and social social i don't you know that we haven't said so far but you know the social hysteria that we see today i think is actually linked in some

weird way to the to the lot to the corruption of values created by these these monetary distortions. We obviously see that in times of high inflation, because, you know, obviously the Germans, as they keep on saying, went nuts during the hyperinflation in its aftermath. But even with this monetary manipulation not associated with hyperinflation, I think it sort of unloosens the bonds of society. So I suppose that's one reform I would like to see. We would need both, right? Because if we had energy, abundant energy that was clean, but it was tethered to a leveraged financial system that would allow it to happen faster, it wouldn't work. So we would need both.

We need the sustainable cleaner energy and we need a more cardened off financial rules system, I think. Excellent. This was a great conversation. What are you doing now? Are you writing another book? What is what topic is burning? You know, I mentioned Jeremy Grantham. Well, my current project is to help Jeremy write his memoirs.

So, in fact, actually, I'm speaking out. At the moment, I'm speaking to him and we're sort of gathering information. And then, you know, here, oops, I've got all his quarterly letters in three volumes of these. And that's going to be my project this year. Hope Jeremy doesn't let me down. And then I've got a couple of other ideas, you know, in the pipeline. But actually, the Jeremy Project will keep me going for the year at least. Excellent.

Thank you so much for your time. And let us definitely stay in touch. Okay, nice to speak to you. And send me your references. I'll read the stuff you send me. But the other thing, I'd like to read the thing about the interest and trees. It's right up my street. Bye then, Nate.

I will do that. If you enjoyed or learned from this episode of The Great Simplification, please subscribe to us on your favorite podcast platform and visit ThegreatSimplification.com for more information on future releases.