We Study Billionaires - The Investor’s Podcast Network - TIP505: The Price of Time w/ Edward Chancellor

Starting point is 00:00:00 You're listening to TIP. Today I'm pleased to be joined by the brilliant author Edward Chancellor to discuss his new book, The Price of Time. What is the price of time? It's very simple and it's very complicated. The price of time is the interest rate. In this interview, we're starting the story behind the interest rate and how it has caused boom and busts throughout time.

Starting point is 00:00:21 And my favorite part is whenever we talk about John Law, perhaps the most legendary character in all financial history. Sometimes reality exceeds imagination, and the story of John Law is no different. Let's just say that boring, of all words, is not how you want to describe him. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Dick Broderson, and I'm delighted to say that I'm joined by Edward Chancellor, Edward, welcome to our show.

Starting point is 00:01:09 Well, thanks, having me, Steve. Edward, let me just jump right into the first question here today. It's about Mesopotamia. What a wonderful way to start and outline. Today's modern-day Iraq, they charge interest rates on loans before they discovered how to put wheels on cards. We know this because Mesopotamians recorded their loans on clay tablets. When debt was settled, the tablets was destroyed. And luckily for historians and student histories, they didn't destroy them. didn't destroy them if they were unsettled.

Starting point is 00:01:38 And I guess that was also sad for the debtors and creditor. So it seems like a lot of debt was unsettled. But interest were generally paid in the same commodity as loan, so commonly silver in Bali. And we know that the Babylon King, Haberabi, regulated the maximum interest of loan to silver to 20% and Bali to 33.33%. With that as a backdrop to our condensation today, there is no doubt that interest has paid a crucial role in societies throughout time. Even the Bible mentioned interest rates.

Starting point is 00:02:09 And in the Bible, we also learned about debt jubilee. So let's start there. What is debt dubley and why is it important for a well-functioning society, perhaps even today? A debt jubilee is an official forgiveness of debt by the government, by the ruler. And we find debt jubilees across the ancient world in Mesopotamia. it became common when a new ruler took power to forgive, actually to forgive the barley debts, but not the silver debts. So the barley debts, one could assume, went largely to farmers.

Starting point is 00:02:46 And then one finds debt jubilees decreed in ancient Israel at a period of, I think, a regular period of 50 years. You get forgiveness of debts in ancient Greece by the lawgiver. Solon, say we have these either linked to the change of regime, a regular time period, or a sort of one-off. Why do they have debt jubis? Because one of the problems that people have noticed about interest since its early origins is that interest can compound over time and that the compounding of interest leads people to get into greater and greater debt in the ancient world that often meant that the debtor would fall into a position of debt, bondage and slavery.

Starting point is 00:03:37 So the forgiving of the debts was a way of leveling, of bringing, you know, this great pile of money of debt back to a level and start again. And, yeah, so that I think is the main reason for the Jubilee. Why do we need it today? Well, I mean, it's only a fringe notion that this. debt should be forgiven today. And occasionally that's, you know, occasionally that's called, there's been calls, I think, you know, 20 or years ago to forgive debt to less developed countries. But our debt, the modern debt jubilee, really occurs through inflation,

Starting point is 00:04:17 what we call, you know, what the economists call financial repression by keeping interest rates actually below the level of inflation. The principle of the debt gets paid off. So we have a sort of sneaky, sneaky protracted debt jubilee. You could say that this year, even though interest rates are going up, inflation is much higher. So obviously the real value of the principal owed in debts is shrinking. So you could say we're at the early stages of an ongoing debt jubilee. It definitely would make headlines if we said, let's just forgive all that. But as you said, we found another way of not saying it, but still doing it. Towards the end of the book, I do mention the case of Iceland after the 2008 crisis. And there, Iceland, probably no country on earth

Starting point is 00:05:09 had borrowed as recklessly as the tiny country of Iceland during the global credit boom, running up foreign liabilities of 10 times Icelandic GDP, and much of the debt that they ran out was wasted on poor investments. After the financial crisis, the Icelandic government put the major banks into receivership and into runoff mode and actually defaulted on their foreign debt. So a default is another way of debt jubilee. And as I mentioned, Iceland going down this route actually recovered much more rapidly than the US or the European countries that went down the different route that we'll discuss later of sort of quantitative easing and low interest rates. So, Edward, let's still stay in time of history.

Starting point is 00:06:01 Let's talk about Seneca the younger, born 4 BC. He's primarily known as historic philosopher in ancient Rome, guess, today. And I find it fascinating how he's thinking about time and how is that related to his views on interest, not only because he is painfully inconsistent, but he still said a bunch of interesting things about it. How did Seneca think about interest rates and how is that perhaps relevant today? Well, I'm not sure if Seneca directly addressed question of interest. He was, there is a sort of inconsistency about Seneca, where he advocates, as you say,

Starting point is 00:06:37 stoicism, really an unworldly position. But at the same time, he was tutor to the Emperor Nero and he massed a great fortune. He gave lavish parties. He lent his money with a group of people, a group of other Romans, into Britain. And apparently it said that when Seneca and his and his friends called in their loans, it was that that triggered the famous British revolt of Queen Budica. But I think that what Seneca does say, and this becomes very important later on, is that time is man's most precious possession. And the important thing about interest and why I called the book,

Starting point is 00:07:21 the price of time, in interest is really putting a price on how we spend our time. And Seneca's notion that time is man's possession is revived in the Renaissance period in Italy. It's at that moment the people then begin more overtly to justify the practice of interest as the use of time, the use of capital over a period of time. I think that's the sort of main lesson that one takes from Seneca. And history tends to repeat itself, or at least it tends to rhyme, as is often being said. We already talked here about the Babylon King and how he tried to regulate interest rate. You also mentioned in a wonderful book, Queen Elizabeth in 1571, signing into law at the cap interest rate at that time around 10%. And yet here we are today and regulators

Starting point is 00:08:15 are still trying to solve for the ever relevant challenge of so-called fair level of interest on loans. It's always tricky whenever you use the word fair. I should say that. But how can we think about monetary value across time? And what is the concept that economists call income smoothing? So the time value is linked to humans' natural impatience that we prefer to have things sooner rather than later. But also, if you're engaged in any economic activity, if you say you have a factory, you're producing something, sooner and quicker you can produce things, the more profitable you're likely to be, and providing you obviously keep your costs under control. And so there is an incentive, or at least it should be an incentive, to use your time wisely.

Starting point is 00:09:06 In fact, actually, although I didn't mention it in the book, I came across the other day, the concept of something called demurage. That derives on the word to demure or to slow. And apparently in medieval Europe, ships were fined. They find a demurage charge if they took a long time unloading their goods in the port. So you see, everything is linked. An efficient economy is sort of driven by a charge on time. And if we don't have any charge on time, we will tend to do things more, to take too much time.

Starting point is 00:09:46 As for income smoothing, when people are young, they can expect their income to grow over time. And therefore, people, say, for instance, students going to university will borrow and then pay back those debts over time. and they might borrow also for consumption purposes. And the extent to which they will borrow and the interest rate they pay is linked to, so speak, their time preference or their degree of impatience. Some people will borrow more because they're eager to consume more rapidly today. Others won't be so much to engage in income smoothing. But there is a sense that when people are young, they're more impatient and keener to

Starting point is 00:10:36 borrow and therefore you could say that their internal interest rate is higher than a person who's old who's not expecting their income to grow any future and therefore not keen to borrow and pay interest. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the

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Starting point is 00:15:07 the Scottish economist John Law, many words could be used to describe his life. I would not say boring is one of them. He conducted the world's first experiment with easy money, certainly debunking the myth that Scottish people should be cheap in any kind of way. could you please tell his story? I know we can probably do an entire episode just in John Law and his quite exhilarating life. I mean, you could do an entire season on John Lord.

Starting point is 00:15:35 Yes. He's the most extraordinary figure in the entire history of finance. And when I think about him, I have to pinch myself, say, is this guy for real? We made him up. So John Law is the son born in the late

Starting point is 00:15:53 17th century is the son of an Edinburgh goldsmith. And bear in mind that goldsmiths at that time were not just merely selling sort of gold and silverware, but they were the early bankers. They were taking in people's silver and gold and lending out, lending the money with paper. So they were starting to use paper notes. And then Law's father dies. When he's young, he inherits a certain amount of money. He goes to London, becomes a bit of a debt. dandy and a fop, spends a lot of his time at the gambling tables, loses his fortune, gets into an argument with another dandy, and they have a duel and law kills this man in a duel, and then law is arrested. He escapes. He escapes jail, is sentenced to death in absence,

Starting point is 00:16:48 flees to the continent of Europe, spends the next 20 years, touring around Europe from one capital another, Amsterdam, Genoa, and other places. It ends up in Paris. And over that time, he's got better at gambling. He has an extraordinary head for figures. He would probably now work for the sort of Jim Simon's Renaissance technology hedge fund. You know, he has a supercomputer in his head that can calculate fine probabilities at a time when people's understandings of probabilities were a bit less sophisticated than today.

Starting point is 00:17:27 He then develops an interest, well, over the course of his years in exile, he develops an interest in, say, economics. In particular, he proposes a land bank, a bank that would lend money against land. And he also writes a famous pamphlet called Money and Trade Considered, in which he argues that money, that at the time would have been considered a precious metal like gold and silver, was really only the, was not an object that was exchanged in value, but really was just a yardstick of value. And if money is just a yardstick of value rather than something inherently valuable in itself, then there's no need to have gold or silver backing money, as we see today. So law is the first, so to speak, monetarist economies.

Starting point is 00:18:26 He believes that if you replace gold and silver currency with a paper currency, you can bring interest rates down. And he believes that if you print more money, what we would call sort of boost the money supply, that you will bring economic prosperity. So those are the ideas he's formed. He goes to France. he presents himself to the regent of France after the death of the old king Louis Catoors in 1715 and he says to the region, can I start a private bank in France? And the regent gives him permission to do so. He then takes over a trading company in France and that trading company

Starting point is 00:19:11 is then merged with the number of other, with all France's foreign trading companies. It also acquires the contract to raise taxes in France. It acquires the French mint. It acquires the tobacco monopoly. And its most famous possession is the so-called Louisiana Company, which laid claim to half the current landmass of the United States. So this is, by any measure, an extraordinary extensive, hold. company, but that law's not finished. He then says to the region, I want to turn my private bank, a bank which was in a way conventional that issued notes that could be exchanged for gold

Starting point is 00:19:59 into a central bank or national bank that was called the Bonc Royal. And this is in early 1719. He then goes for broke by issuing paper currency and withdrawing. gold and silver from circulation. And there's a massive increase in the money supply over the course of 1719, and roughly the doubling of the money in circulation. And interest rates come down. In the early part of the decade, they were about 8% in France, and they fell to 2% and sometimes a bit below 2%. And here you see, we witnessed in recent years people valuing stocks, shares, off the level of interest rates.

Starting point is 00:20:53 So when interest rates are low, they feel that a high valuation is justified for their stock. And that was the case of Mississippi Company, which this enormous business that went up, started to trade on a price earnings ratio of 50 times, which is roughly, roughly three and a half times a long-term average of the US stock market. And that P-E of 50 times is equal to a dividend yield of 2%, which is the same as the current prevailing interest. Now, Law, the final sort of, his final act is to offer to take over, for the Mississippi company, to take over the entire French national debt. And he gets the bond or the people, the government creditors to convert their credit into Mississippi shares. And to keep the Mississippi shares high during this

Starting point is 00:21:50 conversion, he prints money and uses the money to buy the Mississippi company shares. So this, as I say, it's very like a quantitative easing operation, what we would call quantum easing operation, where a central bank is going out and buying debt, or in this case, shares in the company that is acquiring the debt, in order to keep interest rates down. And there occurs during this period an extraordinary speculative. And the Mississippi share price rises 20-fold and a large number of enormous fortunes are made. And this is a period in which the term millionaire is first coined, a French word. So Paris is teeming with millionaires and people come in from all over Europe to try and buy shares in the Mississippi company. And little bubbles appear in other markets,

Starting point is 00:22:48 you know, in London and Amsterdam, in Lisbon. So this is also the sort of first, not exactly globe bubble, but sort of European-wide speculative mania. And Law himself, by his own reckoning, has become the richest man who ever lived in the space of a very short period of time. And he's deemed to be, he's also appointed French finance minister and is considered the greatest statesman, a most powerful statesman in Europe. So this is an extraordinary achievement, if you think about it, for a man who starts out in life as a bankrupt murderer to become this great figure. And then it all falls to pieces. It falls to pieces because inflation enters the system, not the asset price inflation that everyone likes, but the widespread in commodity and food prices that creates

Starting point is 00:23:45 what we would call today a cost of living crisis. And law then share price, the Mississippi company starts to wobble a bit, people start selling Mississippi company shares and trying to translate their wealth into something more secure. And another sort of English word, or at least financial word, coined at the time, was realization to realize your profits. To make real, it's an interesting term because you think that during bubbles, the very notion of a bubble, is that the wealth is chimerical isn't really of any substance. So to realize your profit is to take something that has sort of perhaps no value or dubious value and turn it into something real. Anyhow, so people realize their profits, then the scheme falls to pieces and law then has to choose.

Starting point is 00:24:39 Is he going to carry on inflating or is he going to sort of put his foot on the brakes? and he chooses to deflate the currency or some of the currency from circulation. And the whole Mississippi bubble collapses and Loris has to flee the country. In the space of 18 months, he goes from a projector into the world's richest man ever and then to having to flee, leaving behind his wife and daughter and his fortune. And then the rest of his life, he really spends on the road going from one country to another, ending up in Venice, eight or nine years later, where he goes back to his old gambling. And apparently seems to earn a so decent sum of money offering people of dice.

Starting point is 00:25:25 So he has, as you say, a pretty eventful life. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. And customers now expect proof of security just to do business. That's why Vanta is a game. changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise

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Starting point is 00:28:58 about economic history, he is usually always there. And I have to say that what you do in your book is perhaps the best I've read about your law. It's so fascinating the way that you tell his story. And one thing I always think about whenever I read about John Law is, do you think he truly believed his system would work? Yes, I think so. There is an interview, I think I cite, where a French ambassador visits him in Venice towards the end of his life. And law still seems to be convinced in the viability of his plans.

Starting point is 00:29:32 You like, as I say, the first monetarist, the first Fiat Money Central Banker. And one thing we know about Fiat Money Central Bankers is they don't always, when they make mistakes, confess to their errors. There's something quite dogged about it. I think he was way too ambitious, moved far too quickly, and didn't particularly have an eye for the details. One biographer says that law scheme was the most ambitious economic experiment before the Russian Revolution. And I think that's a fair description.

Starting point is 00:30:12 But go back to the way I'm trying to write it. You're right, you know, many people have written about law. So it's not exactly the unknown story. What I'm trying to do is to show how law is one of his prime motivations is that, is to bring down the interest rate. So he is, as another biographer said, a low interest rate advocate, and he succeeds in his aim through monetary policy. And the modern monetary economists look back at law and they say, well, law provided the framework for modern central banking. And these comments were being made over the course of the last decade at the time of the quantitative easing and so

Starting point is 00:31:00 What I found rather extraordinary is there you have it that law has, you know, the first great experiment in quantitative easing to revive an economy and to bring down interest rates that ends in the most phenomenal disaster. And our modern central bankers were either wittingly or unwittingly following law, but seemed to pay no attention to the fact that the system ended. with a resounding failure. It is very interesting to think about, and he was just so smart, and like you were alluded to, he might be too smart for his own good.

Starting point is 00:31:40 It's so interesting how his scheme was, in many ways, designed to alleviate the French nobles that were heavily indebted for us, and here we are. Let me leave it at that. But, Edward, you compared the collapse of Lehman Brothers in September 2008 to be somewhat similar to the French economy after the death of Louisville. a toxic mixture of deflation, high unemployment, and soaring government debt. And it seems like monetary policymakers respond to the conditions by taking the lead from law's copybook.

Starting point is 00:32:12 And you already sort of like alluded to some of that before in your response, but could you paint some color around how come? How can we connect those two stories? Well, the Louis Catoos, the so-called Sun King, had a very long reign and got the cut France into huge debt, because he was constantly engaged in warfare with Britain and Holland, other places, and very extravagant. And so at the time of his death, there were a huge amount of debt. I think the French debt was about equivalent of 100% of GDP, of French GDP, and the debts were trading at a discount to their face value. And the country, as you say, was,

Starting point is 00:32:57 was depressed and the price level was falling. And law's idea, so you had this sort of bad, bad debt, deflation and economic depression and a large, not just bad debts, but a large mountain of debt. A law's idea is that this can all be cured by waving a monetary wand. And I think, you know, he then really, as I have said before, when he then, fancy royal bank and issues paper money, he sets up the progression from a gold back currency to a pure paper currency, what we call a fiat currency. People who speculate in the Mississippi company is on, you could say that they're envisaging a world in which, you know, the riches

Starting point is 00:33:46 of the United States come forth, or they're envisaging a world of paper money and manipulated interest rates. But in fact, these things, the speculators often see the future. They draw a distant future into the present. And in this case, obviously it took a while for, you know, the US to the American riches to be established, but also fiat money didn't really become established until 71 when the US brought the post-war Bretton Woods currency system to an end. So law was almost 250 years ahead of his time in that respect. I think that, you know, there is, you know, as I say, to go back to it, one of the things that we know about Fiat money is it has an inherently inflationary aspect to it. You know, the gold dollar, the dollar was worth, an ounce of gold was worth just, I think,

Starting point is 00:34:46 around $2324 up till 1933. And now, you know, it's probably around sort of $18, $19,900, yeah, $18 or $1,900 to an hour. So you can see huge collapse in the value of money. And I think that law's inflation, that, and what law does is he encourages people to think that you can use money to dispel your economic problems. But it would appear to me that the inevitable consequence of that is that you depreciate the value of your currency. And that really is shown in his own period,

Starting point is 00:35:31 but then, you know, of course of the 20th century and then as we're experiencing again today. Just one quick note on Luis X, the Sun King, it was said that he used wine in his fountains whenever he was having his elaborate parties. And I want to use that as a segue to the next question, because one person who probably, I don't know if he would even be drinking wine, but definitely not having in his fountains, would be John Bull. And our audience might or might not be familiar with John Bull.

Starting point is 00:36:03 He is the persification of British common sense. And we know that John Bull can stand a great deal. but he cannot stand 2%. So former East India company Dr. John Fulton, who turned banker, claimed that 2% was the tipping point into financial folly. Looking back at the recent yield, so more last year, perhaps than here in 2022, I just find that to be a quite interesting statement. Could you please talk to us about the psychology of the 2% tipping point?

Starting point is 00:36:34 So that 2% tipping point, as you mentioned, was first described by a very obscure figure called John Fullerton, who no one would have heard of. But people do, who know bit about financial history, are aware of the most famous 19th century financial journalist, editor of the economist called Walter Badgett. And Walter Badgett, he comes from a banking family, not far from where I live in Somerset. And so he knew about banking, knew about finance, and he went and he became editor of the economist. And Badgett noted that, and I think he borrowed from this fellow Fullerton, that the speculative manias and lending crises tended to coincide with periods of low interest rates. And it was he who coined the phrase, which he repeats again and again,

Starting point is 00:37:31 In his writings, John Bull can stand many things, but he cannot stand 2%. And then Badger to elaborate, it's faced with a loss of income, people will do foolish things to make good and they will engage in speculations, into canal speculations or railway speculations. He says, he makes a good point at Badger where he says, people, when interest rates come down, you must either be, the investor must either be less poor, so less rich or less safe. In other words, there is a trade-off between risk and return. And what we find, and this is what modern research confirms, is that the periods of low interest rates do encourage people to take

Starting point is 00:38:24 more risk. And in fact, the recent research suggests it's not 2% yield, but actually a 3% yield that is the threshold. And we see, and as I describe in the book, you know, in the low rates of interest that prevailed after global financial crisis, the lowest interest rates in five millennia, all sorts of risk were taken. I also said slightly earlier writer on economics an Italian called Ferdinando Galliani. And Galliani has an interesting definition of interest as being the price of anxiety or the price of risk. So you see, there is a, and that's one of the key functions of interest that I think is misunderstood by the policymakers, because they think you can lower the interest rate, I can lever, in order to encourage

Starting point is 00:39:14 people to borrow more and to, you know, bring deflation to an end, to lower unemployment. But if you're playing around with the price of risk, you're also going to be unwittingly encouraging a build-up of risk in the system, and you probably won't know where that risk is building up. So, Badgett, I think, deserves great credit for making this early connection. And I have a chapter on early connection between interest and speculative booms or bad lending, not just bubbles in stocks, but also foreign lending booms as well. And I have a chapter sort of showing how that pattern played itself out over the course of the 19th century. It's difficult to have an episode about economic history without talking about the great economist,

Starting point is 00:40:10 John Manny Keynes. I actually just finished the letters from Nick Slee, which is a brilliant British investor. And he actually mentioned John Mennon Keynes. And he said that allegedly one of the last things he said before he died was that he had a deep regret of not drinking more champagne, why he had the chance. That was not what the question was about. It was just a wonderful anecdote. But even the great economist, John Mena Keynes, seemed to have changing thoughts on what economists call the natural level of interest. Could you please, Edward, explain to us what is that concept and would you argue

Starting point is 00:40:42 that it's relevant to manage the monetary policy of today's economy? It's a thorny problem, the question of what's called a natural rate of interest. If you look at the writings of early economists in the 17th century, they're tending to, remember you mentioned Queen Elizabeth's statute on usury that fix the maximum rate of interest that was charged in the country. And in the 17th century, a lot of debates about should the usury level be brought lower and lower, or should the market be free to determine borrowers and lenders free to determine, borrowers and lenders free to determine what rate of interest charge. Now, that, that, that I think, is the early, the early formulation of a natural rate of interest. It's the rate, you know,

Starting point is 00:41:35 if you go and buy, I don't know, packet of matches, the price you pay is the natural price for a packet matches because you, you don't have to buy that packet of matches and a seller doesn't have to sell it to you. So it's set in the market. It then becomes more complicated. It becomes an idea of monetary economists, in particular the great Swedish economist, not Vixel, in writing in the late 19th, early 20th century. And Vaxel suggests the natural rate of, he has rather complicated view. He says the natural rate of interest is the return on capital of an economy without money. And then he says, if you use, he says, if you sort of superimpose money on the system, the rate of interest will reflect that return on capital.

Starting point is 00:42:27 He then says, you can tell the natural interest rate. You can't observe it directly, which is one of the problems of the natural interest rate, but you can infer it from whether there is inflation or deflation in the economy. So Vixor says, if the interest rates, if the central bank is keeping interest rates too low, and inflation follows, then the interest rate, the policy rates are below the natural rate. He says then if the price level falls, if the price level is falling and you have deflation, then Vixel says then the policy rates are above the natural rate. And this is a view held by modern monetary policymakers and central bankers. And it was the view that was the rationale for these extremely low and negative interest rates

Starting point is 00:43:21 in the last decade and also for the quantitative easing. And I argue somewhat differently. I say forget about inflation and deflation. You don't know what the natural rate is, but there are other things that would be telling you aside from inflation that the policy rate was below, so to speak, the natural rate. rate, and you would observe, the things I observe are the asset price inflation that we've just talked about, credit booms and so forth. Those would be, to my mind, the indications that the policy rate has been set too low. So I say that you can tell the natural rate by its absence

Starting point is 00:44:08 because bad things, so to speak, or dangerous things are happening in the financial. financial system. So one thing I should add to that is I didn't mention the misallocation of capital. If you have interest rates at too low level, you will have a misallocation of capital into projects that won't deliver a satisfactory return. Another sort of grave problem from interest rates being too low. Yeah, let's talk a bit more about that because I think our listeners are quite familiar with Schumpeter's evolutionary process of created destruction. So to your point before, why have the low interest rate put a break on the process by having now unnatural selection and capital destruction? Well, I mean, I discovered the writings of a late 19th century American economist who's president

Starting point is 00:45:03 of a VAL called Arthur Hadley. And Hadley actually suggests that interest rates lead to who encourage the process of natural selection. If you think about it, we often talk about the interest rate as a hurdle rate for an investment. So, if you will, the higher the hurdle rate, only the more efficient companies can get over a high hurdle rate. Now, Schombeter, the Austrian economist, in his way, perhaps the second most colourful economist after John Law. And actually, Chester's brilliantist's law. But Schombeter has his notion, famous notion of creative destruction. In Schumpeter's world, profits are always dwindling away and the economy is sort of moving towards sclerosis. So you need a constant flow of companies

Starting point is 00:45:58 being created and other companies being destroyed and innovation and entrepreneurs. And I argue this is not a fashionable position. And it's very much. against the view of the Keynesian economists who tend to dominate the world of academia and policymaking, that the low interest rates of recent years have impeded the creative destruction in the economy. And you can see that by the relatively low levels of policies that occurred after the global financial crisis in both Europe and in the United States. And then later by the proliferation of so-called zombie companies, these were companies that couldn't afford to pay their interest. Their profits were not large, sufficient to cover their interest charges at a time when interest rates themselves were at historically low level. And I also argue

Starting point is 00:47:03 that this lack of created destruction then has an impact on productivity and therefore, and the lack productivity feeds through to low wage growth. So people have argued, if you will, the conventional central banker view or the establishment view is that becomes a justification for lower interest rates. At one stage, I think the former Fed chair Ben Bernanke in around, say, 2018, responding to low productivity figures, he says this is done. obvious news for interest rates, whereas in other words, that interest rates will come down because productivity slip. I'm arguing, I'm reversing the order.

Starting point is 00:47:51 I'm saying the low interest rates appear to be actually leading to low productivity. And then you get a sort of horrible feedback loop because then the low productivity feeds back into the low interest rates. So I think one of the problems, and I think one of the problems that besets modern economics that in my experience, people who've actually worked in financial markets as investors and bankers and so forth, where we, those are practical experience, realize the sort of feedback between finance, between our perceptions or policies and the financial system and the economy, and there are these constant feedbacks, what George Soros calls reflexivity, whereas

Starting point is 00:48:35 the academic economists nowadays tends to just. have an abstract view of the economy that without really any impact of, you know, of financial and monetary policy on this abstract view of the economy. It's a very, to me, it's a view that is extraordinarily far away from the reality that one can observe. Edward, I wanted to end this interview with a wonderful quote from the very beginning of your book. And the quote goes like this. Our earth is degenerate in these latter days. Bribery and corruption are common, children no longer obey their parents. Every man wants to write a book, and the end of the world is evidently approaching. Now, one might think that this is the headline of today's

Starting point is 00:49:24 newspaper. Now, I must stop you there, because that quote comes from Homer and Siller's famous history of interest rates, which is the Bible of giving you the five millennia history. My book is about interest, obviously writes about it, and Homer instead of writing a history of interest. So they cite this claim, so I couldn't resist putting it in, but actually I did a bit of research on it, and it's almost certainly apocryphal. In fact, at one stage, I was going to use as epigraphs at beginning of each chapter. apocryphal quotes about interest. Like, for instance, you know, the claim that Einstein said

Starting point is 00:50:08 that interest was the eighth wonder of the world, which Einstein never actually said. It's so perfect that this apocryphal quote, that I couldn't resist putting it in slightly as a sort of inside joke to Dick Siller. Sennie Homer's dead, but Dick Siller I know, and I thought it might amuse him if I replicated it. There's a very good website quote investigator. If you ever ever think a quote is too good to be true, you have to go to the Quays Investigator website where the writer will say, where they research the quotes to see what they have. So it could be true. It could be a certain, but it's probably just made up sometime in the 20th century. But it does seem to, you know, it does seem to apply today. I mean, not least, you know,

Starting point is 00:50:55 me publishing a book. And you try and put a book out today. And the publisher says, well, you know, 60,000 books are published in England every year. And you're thinking, wow, that's slightly more books than we probably need. It's so wonderful that you would say that because I can't help but being captivated. Whenever I read that on the very first pages in the book, I was thinking, this has to be a wonderful book. Just the last question I wanted to ask you here before I let you go. I want to be very respectful of your time.

Starting point is 00:51:25 But you started the price of time from the origins of Mesopotamian up to today. What is the most surprising fact that you learned on this journey running your wonderful book? I think, if I can call it a fact, is that over the course of writing the book, I came to realize how central the interest rate was to all of human life and sense of putting a price on time. but in particular to the capitalist cyst, because as I say, someone unique, if you have what we call a piece of capital is something generating income, and unless you apply a discount rate, an interest rate, a capitalization rate, to that income, you can't have a price, you would have an infinite price. I think one of the 17th century economists said that, you know, without interest, there would be no difference to him the value of an acre of land and a value and, and, and, and, and, and, and, and, and, and, you know, 2,000 acres of land. Interest is that we have lost sight of this most extraordinarily important, the most important economic, if you want to call it for want a better word, variable.

Starting point is 00:52:44 And because we lost sight of what it did and the richness of its functions, what my friend Jim Graeme calls the, calls interest the universal price. Because we've lost a sense of the universality of interest, I think, you know, we have gone down a pretty bad route and we're at the moment, you know, with, you know, obviously with inflation coming and interest rates rising and the financial markets cracking, we're sort of beginning to recognize the errors of our way. And here we are today. Perhaps that should be the last famous words.

Starting point is 00:53:22 The name of the book is The Price of Time. It's a wonderful, wonderful book, Edward. Would you like to say a few words about the book here before we round off the interview? My definition of a good book shop will be my book is the sale in it. Well said, well said. Well, Edward, thank you so much for your time. Okay, thank you very much, TIP. Thank you for listening to TIP.

Starting point is 00:53:45 Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP505: The Price of Time w/ Edward Chancellor

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