Edward Chancellor on the Real Story of Interest

The Real Story of Interest. It's all about the history of interest rates, money lending, investing, speculation, funded by banks and loans and credit. According to Chancellor, interest is the single most important feature of finance, both ancient and modern, and it's how we allow transactions to take place across time. I found this conversation to be fascinating, informative. He is a one of a kind and I'm confident you will find this to be fascinating also. With no further ado

my conversation with Edward Chancellor. Let's start with your background in academia. So you study history at Trinity College. What is a Master of Philosophy in Enlightenment UM and history from Oxford? Am I mangling that? In American what we called it m phillis is a shorter version of a doctorate or de phil. Read a research paper and you know,

and one had exams at the same time. It was originally created as a sort of academic teaching degree, but then got somewhat usurped by the PhD. And that was where I was going to go. It looks like you were setting yourself up for a career as an academic.

I thought about it, and then I was invited with the other graduate students to my history professor's how it's the outskirts of Cambridge, and I thought, well, this is where this is where the guy who's you know, he's got to the top at Oxford, Liz, I'm going to go and get a job in the city of London. So that's what I did, and I sort of didn't. My thinking on leaving you, on leaving academia is that if I need to earn a living, I might as well make money from money, which is, you know, what

Aristotle disapproved. So it was a sort of anti Aristotelian act of going into the city. That's really interesting. So you go into the city of London, and is that where you began at Lazard Brothers or part of your career. I started at Lazard's no relationship to the US Lazar They're all they called it Las Brothers in London, last Fare and in Paris and that's out Frere here. So

they've now all been drawn together. But when I was there, there were sort of interconnected shareholdings that were joining the different branches together. Uh. I went into what's called corporate finance. You know people would see now a sort of m and a department in the in London that had to be pretty busy time. Well, I was actually in a sort of subgroup there which was called corporate Strategy. We

were sort of doing. Our job was basically to give sort of a strategic advice to Lazard clans which would generate capital raising, mergers and debt financing for these companies. It was sort of self interested advice. But I didn't last very long there because I thought I didn't like corporate finance as sort of I felt they were sort

of ruthless, cynical, always looking for a deal. And I remember once, you know, one of my colleges says that a friend, one of the French Lazard Frere partners was asked by a sort of junior how much should we tell our plant to bid? And the French partners said the price is right, which Earth's our client say. There's a lot of cynicism in corporate finance. I didn't find

it intellectually interesting. You know, you had all those deal books you can imagine, and tedious, not not thrilling, And I was a sort of grunt level sure, and um I came to the point where I thought, well, I'd sooner be driving a bus and continuous. So how did you transition from Lazard to g MR. It wasn't a straight path. I When I was at Lasar's, I heard you can't work in finance without people talking about the

great speculative bubbles of the past. So people we would mention the sort of British railway man near the eighteen forties, and Tulip Maine and so forth. And I I left with no more money than I had when I came in, and I decided I would write a history of financial speculation of my own bat. I mean, I've read the other stuff in your Kindleberger, Braith and that sort of stuff, and I still felt there was run to write a new book. The space had not been mine to exhaust

I think. I think Kendleberger is very good, but if you're in he's writing a sort of taxonomy of the bubble, And as an historian, I wanted to write the narrative of the bubble. Now you're probably wearing a Charles McKay's extraordinary popular I mean, that's your eighteen forties narrative, and it's highly inaccurate, and yeah, it's full of sort of ledgen me talks about the black che lip and stories of people bite you know, people biting them in with

the tulip beell. He talks about you know, sailor coming along and mistaking a tulip bull for an onion and eating in it and it turning out to be a you know, a red tulip bulb worth thousands of Amsterdam town house. And um, McKay is also from a sort of investment perspective. You don't really get a proper picture

what's going on. Um, So in some ways I was sort of writing and then obviously McCary writing here, and he covered Mainia, south Sea Bubble and the Sippy bubble, so I thought one could write a sort of arc of financial speculation up to the current day. And then in the course of writing it, the dot com bubble started to form. So that made it more pressing and in a way more interesting because you could when I see it in real time exact but also you could

see these parallels. So I was writing about the British

railway Mania. Railways were this revolutionary technology that was going to change the world, going to change civilization, the speed with which and roughly at the same time, remember Mary Meeker at Morgan standing right with the Internet report that was being sold in barn some Noble in ninety six, and you know I read the book, but also in some journalism ninety in the f T saying hey, you know, this internet stuff looks a lot like the railway main

near of and hadn't really started getting going. As a reminder, Alan Greenspan's infamous irrational Zuberan speech was late in December. Yeah, and it we were really just ramping up for the next couple of years. Yes, So the book comes out I think June, is that right, correct? That that's fairly

auspicious time. So it came out with Faris Strauss and Cheru here, and I said to Jonathan Classy, the editor, you've got to get this out quickly, and FSD, to their credit, reduced the publication time from their normal one year to six months. You still had, you know, fifteen months. Well, let's say June, you had nine months before things really topped out. Yeah. Well, as you know, bearish messages often type early, even it was it better to have left

the publication date later? I don't know. I mean you remember a bit later. Robert Stiller's Irrational Exuberance came out two thousand, right, Yeah, so I was probably a sort of eight nine months before. But it's a book. It's not you know, you're not picking the top or bottom. A book is a multi year process, and it's you know, it could have been down thirty six thousand, which came

out around the same time I I were. The first thing I spoke at was a Goldman Sachs asset management conference, strange enough, in a place called Carefree Arizona, and the thirty six thousand people were there, and I was saying, this is a great bubble which is about but this would have been in late and I said, you know, we're hearing Carefree Arizona. But around the corner is a place called Truth or Consequences. And you know, perhaps we

should really be meeting there. You can imagine you give a bearish message at a bullish investment conference and no one listen to you, and not a single one of the partners or anyone like that thanked me or really viewed for the talk. It was. It was just, you know, completely I felt completely blank. But actually I'm later met one of the diathetic six thousand people, Kevin has I met him. He's actually very nice fellow. And he did when I met him, let's say in two thousand and ten,

he acknowledged that they've got things wrong. James Glassman and Kevin Hasset has it now not too long ago, just before the pre pandemic period. Like Lates, they kind of came out when the Alford's crossed thirty six thousand, maybe it was one um, they kind of came out and said, see, we told you. And it's like, you know, if you write a book dow a hundred thousand, well, I guess you just got to come back in sixty years say

I told you so. But twenty three years later, you don't get credit for saying you could buy starts right here right before they collapse. But the other point is that when when people saying, oh well, and I think Wolf Street Journal had an editorial, that's how you know

it's going to be Yeah. But then if you look at the valuation the market at the time, the market was the US market at the end of last year, So probably where on the what we call the shill Ape ratio, the cyclically adjusted price Sarnings ratio, which is the sort of most reliable long term valuation measure, it was at its highest level at the end of last year than at any point apart from the last stages of the dot com bob, higher than in n UM

and higher in the nineties from markets expensive um. And you know what we also know, these of us who worked in investment, is that your future returns inversely related to the valuation level. So perhaps every time we get to thirty six thousand, you can expect a long period of decline. I mean, in the end, inflation will and accrued earnings will mean that we'll get to thirty six thousand one day on a sustained basis, but just probably not the next decade or so. That's interesting. So you

write the book, it's published, a great acclaim. How did you go from that and other writings to GMR. So the quant shops, Jeremy Grant and GMO, Rob Arnard, First Quadrant and our research affiliates Clive as News a QR, a q R. They were in trouble. They were not buying into the TMT bubble. They were buying their beloved value stocks and nay one was everyone just saying they idiotic quantz and that that approach was no longer to work.

So then they found that they saw this book came out saying look the you'll be right eventually, and then they looked at the dot com bubble looks a lot

like these historical bubble. So all of them independently, Jeremy rob Cliff read the book and got in touch with me, and Jeremy became you know, I became more of a friend, but I didn't go straight into g m O. I then I was doing journalism for Breaking Views, which was the sort of dot com startup f x f T people now owned by Reuters, and started doing some and then I did some research for Crispin Odu, London hedge fund guy, and so Crispin and I were having lunch

in late two thousand three, Crispin said. We were talking about what was going on in the markets and world, and Crispin's I said, it's really all about credit. And I said, yeah, I agree, And he said, well, why didn't I just pay you to write a report and to analyze what's going on. So I spent next sort of nine months looking at what was going on in the US and the UK and the credit boom and real estate boom and development of you know of securitized lending and sub prime so forth. And then I put

that out. I said, I did that for Crispin, but I also sold it as a report, but not for wide distribution, sort of thousand dollars a shot, and that went to a sort of a few people. I gave a copy to Jeremy as a present, and then I was having lunch Jeremy and Boston. I was. I was working for Breaking Views in New York and we were

we were returning to England after copy years. I was having lunch Jeremy and the In um summer two thousand seven, just after the best terms, hedge funds started blowing up, and Jeremy said, well, at least there's enough structural redundancy in the banking system, and I said, what the hell makes you think that? And what was his response? Well, he sort of he thought about it, and then I went home. I went we have a house in Cape Cord, and I went to Jeremy Cord and said, would you

like to join the AST allocation team? And it's a hard thing to say no to? Why, I said non initially, um, and then went back to England. Then he called again and you know, because he's investors sometimes say lights throw job office around them, very serious. And then he called a couple of months later, and then I decided, yeah,

I would take it. And Jeremy wanted a obviously I've done a lot of work on the credit boom, but he also wanted sort of and not I said, you know, to Jeremy, I'm not a quant and a lot of GMO is, so to speak, quanti filled with quants quantza and Jeremy said, I'm not a quant either, So he wanted a sort of non quantity view input into the acid allocation process. And I assume that worked out pretty well. Um, yes, yes, and they did. They did well during the financial crisis

thanks to me that they were well positions. Yeah, they had you knew the ecty allocation. I mean, I didn't want to blame my own trumpet too much because most of the positions were in place. The quality funds, you know, which more defensive and less leveraged and low allocation to UM a relatively low allotaication to equities, and then the hedge funds, you know, sort of long short positions have

benefited in the financial crisis. My only real contribution that year was right at the beginning when I the first week I joined GMO, I had written a piece in an FT column I had at the time saying, don't believe this story that emerging markets can decouple from the rest of the world, and UM Jim was still sitting on a massive emerging market the position in the asked allocation team, and I tried to sort of chip away

that with Jeremy and not having much success. And then a the c ls A Asian Economists called Jim Walker. I didn't I ever came across him. He sort of gottsman with a sort of voice like a Presbyterian minister. He was also on the sort of anti decoupling story, and he he was barish on him. And I dragged Jeremy to Jim Walker, and he said that this scotsman with his gloomy voice was more effective at persuading in

than I, with my language English drew. And then Jeremy went out and sold all the emerging positions several billion dollars, and within I didn't know two months, he brought them back at half the price. So you earn your keeper, I mean only by I think it was Jim Walker who did the thing, but at least I got Jim. Yeah, and that sort of I suppose I used to say that sort of paid my way while I was there.

Absolutely fascinating. So let's talk about what's with this quote that I like from a nineteenth century trader, James Keene. All life is speculation. The spirit of speculation is born with men. Tell us about that, huh, well, I mean the act of speculation is to look out into the future. The words speculator is um Latin and was a Roman military guard whose job was to look out and see whether the speculate on dangers with kind of out of

the hill um. And particularly when you get into what financial markets, a capitalist world, you're always trying to anticipate what's going on. Since in that sense you know, even people who describe themselves as investors are also necessarily speculators. But when we talk about speculation, we often talk about sort of unfounded or irrational or dangerous gambling type tendencies. So that leads me to the question, what is the

actual difference between speculation and investing? Clearly they're both a gamble on the future. Is it about the amount of risk taken and the psychology of the person involved, or is it something a little more quantitative? You've read Sweds

where are all the customers yachts? And you remember there he says, the difference between speculation and investment is that speculation is an attempt, normally unsuccessful to turn a little amount of money into a lot, whereas an investment as an attempt normally successful to make sure a lot of money doesn't doesn't become a little French wed? Right? Is

that a fred ready right? So um embedded in that is the idea is that the speculator is going to be taking more risk and and not concerned with preservation

of capital all the way an investor might be. Is that so the speculator, now called the book devil, take the highmost, And that is really reflection of the you know, what they call the greater full theory of investment is are by a shibu in new coin or a n f T and sell it to you Barry when bike, because I think Barry is a bigger sucker than I am, and that he'll take it off me from a bigger prices. That's a sort of Pondsi scheme or pyramid chain letter

dynamic to a speculative bubble. And the other aspect of the speculator is he often gets lured into envisioning how the world will be and gets drawn into these new technologies, you know, whether it's you know, radios or cars in the twenties, or internets, stocks in thees and various types of you know, we'll think of all those SPACs and

rotric vehicles of the last couple of years. And the speculator the trouble is that they look into the future and they draw they imagine the future is actually much closer than it turns out to be. And so you could say that there operating with a sort of hyperbolically discounting the future, or just say they have two low discount rates, so they're drawing everything forward. And even with the Internet, which as we know, established and change in

one's life within very short period of time. Even then, you didn't stop the NASDAC coming down by more than cent, a lot of these dot com businesses flaming out. But by the way everybody talks about the Internet happening so quickly, it began in THEES as a way to survive a nuclear attack and be able to launch the retaliatory codes through DARPA. So it took decades to be commercialized, in

more decades to become more broadly adopted. So if you were an Internet investor in the late eighties or early nineties,

most of those companies didn't do well. But I didn't cite and devil take the homemost was some research from a guy I think he was at Bell Labs at the time called Andrew Odslico, who is now at University Minnesota, and he and a colleague worked out in that the projections for Internet traffic growth, that that the likes of world Com, the big telecoms company, was saying that the Internet traffic growth was doubling every couple of months, and Odico found out that actually the rate of growth was

slower than that. It's still doubling, but I think once every six months or so, and the result was getting in the mania. People get over fixated on growth, they have growth projections, over optimistic growth projections. Then you get

the over investment, speculative companies raising money the overinvestment. And then if you remember, after the dot com bust, you had these miles and miles of so called dark fiber because you had excess capacity uh in fibotic cable, which I mean I saw commonly cited about excess capacity, and that ran for several years, a bit like the sort of if you think about it, the excess US home building during the real estate bubble, which took you know, when they're more than I think it really took from

two thousand and six to two tho twelve before that excess build had really just worked his way out of the system. And then the hangover from that is we were underbuilding houses for the rest of the decade because once bit and twice shy and then when suddenly there

was demand for houses, there's no inventory. There's a shortage. Yeah, that's I mean, given now what we're going to get around to later now that thirst year mortgage rate to stubble I think the Americans are going to be grateful that they didn't do that much building in the last few years, because otherwise we would really have a replay

of two thousand seven eight. That's really quite fascinating. So I mentioned earlier the book comes out in June, pretty auspicious timing, but it raises the question, with the publication of your new book, how often does history repeat itself? Are all of these bubbles and manias and collapses? Is it pretty much the same playbook that just substitute internet for railroads, substitute houses for telegrams? Do do all these things just follow the same sort of cycle just forward

in history? Well, Jim Grant has a comment that, as he says, well with stepping on the same rake. And I have a friend of mine financial structures. It's in Edinburgh called Russell Napier runs. Oh, I know the name he wrote a book on. He wrote a book called The Anatomy Are the Bear That's right, the excellent book. He has a financial library in Edinburgh called the Library

of Mistakes. And the idea is that you can learn everything you need to know in finance for an investment career by actually working out the mistakes people have made, and that does seem to be yes, a sort of similar pattern, although I should add that you know, it certainly doesn't help you on the short side betting against

spective bubbles. When I was at GMO, we colleague and I ran a sort of quantitative analysis of aspective bubbles and we we crunch released my assistant did ten thousand years of data of various commodity markets and real estate markets and stock markets around the world. And what we found is that bubbles are indeterminate in length and they also intertermined as to how high they can go. So if you don't know how long the bubble is going to last and how high it's going to to rise,

then you might be able to identify a bubble. And I don't think that's frankly that hard, and I think that's useful. If you're just you know, a long only investor, you can stay out of the bubble market. But the timing on the downside is really difficult. Yeah, and think what we've been you know, look at the last decade

we had. You know, people were talking about dot com two point zero back in if remember and you know, I actually one of my last projects that gm A was to do a sort of to look at what was going on from economic sentiment perspective, looking at various different measures in a bull bear ratio, amount of margin,

loans and the system. I can't quite remember what they were, but only I put them all together and it looked, you know, that speculative sentiment was very inflated in twenty and actually I presented this to Jimmy Clans and Jeremy got up had said, I think the boom mark it has lot good to run. And the other day he was tweaking my names by saying, you know, reminding me that that I had been barished and that he'd been a relatively bullish But Katie knew there was another seven

years and it got pretty um. What happened in was nothing like you know, it was off. I mean, by the way I have. My partner, Michael Batnick wrote a book that your colleague Russell Napier would really appreciate, called Big Mistakes, The Best Investor and Their Worst Investments, And he went through the history of George Soros and Warren Buffett and all these you know, legendary investors and their giant mistakes and what they learned from them. I'll send

you guys a copy. You'll appreciate it. And that definitely belongs to the Library of Mistakes. Yes, for sure, it's literally exactly what he was discussing. So again we see auspicious timing on your part to put out a book on interest rates in the middle of the most rapid increase in inflation since you know, the nineteen eighties, the fastest rising set of rates from central banks. I think you could say, ever from zero to three and a half on the way to four or four and a

half percent. Your timing is quite auspicious. When did you first start thinking about maybe it's time to write a

book about interest rates? Well, quite a long time ago, I think I. I got interested in the whole subject about a decade ago, and I felt when I did this work on the credit boom before the financial crisis, I belonged to the school the thought that when the Greenspan Fed took us FED funds right down to one per cent after the dot com bust, that ignited in my mind the Rita's tate bubble obviously a giant factor.

Has anyone actually made a case to say no, no keeping rates under two percent for three years and under one percent for a year had no impact on real estate. I mean it's not the only factor, but it's pretty hard to say, oh no, not relevant. Whether you know the FED under Nobel Lauriate Banankey, don't we all know

that's nonsense? They yeah. I mean I think I write about that in this new book, where money flows off to the emerging markets when dollar rates are low, and then it comes back because these guys they're not saving, they're actually just buying long dollars and they're buying them to manipulate their currency in China most of all. Um. But then you know, I suppose difference between Banankee me is that blanc has a sort of abstract view of economics. Was I trying to look at what's going on in

the real financial world. Although to be fair for an academic, he actually got to put his theories into practice, is fed yea yes, And that's um problematum. I mean you you remember it was in Milton Friedman's birthday and right when it pass two Freedman's ninety birthday party in the FED, Bananci says, you know, facetiously to Freedman, apologizing for the Great Depression on behalf of the Federal Reserve and ensuring that it won't happen again. And then, you know, five

years later we get melt down. You know that Bananchi in the Fed had, in particular Bananche you know, had no inkling of what was about to happen. And then we didn't get a great depression, but we then got into this era of extremely low interest rates and of quantitative easing, and that was associated with a period of what they call secular stagnation or extremely low growth, and we never really got out of that until the pandemic.

Well we didn't get out. I mean, the pandemic was just the last gasp when they went back to quantity of easing and they really became into the House of Lords. British House of Lords rate a report on quantity easing lastly, which they called a dangerous addiction, and Bnanche introduced the this financial dope and I went off to work for hedge funds or whatever he does nowadays. He's a consultant. He's a consultant, right, they consult So let's bring us

back to the book, which is really quite fascinating. You start in Babylon with the origins of interest, and you go straight through the most recent boom and bust. How did the concept of paying interest on money begin? Well, what we know is an interest is a very old phenomenon five millennia at least before Babela. I mean, well, if you look at the words in in the ancient languages, including Assyrian and Greek and Latin and Egyptian, all the words for for interest a link to calves and lambs

and kid goats. So there is this sense that interest must have existed in prehistoric societies. And the idea was, you know, I'll lend you my cow, but a year later, I want the cow and a calf back, and you can keep if it has you can keep the milk. Now you can keep the extra cars. And actually, as I sit in the book, you know the Americans were still in at the beginning of the twentieth century. They

out in the Midwest or whatever. People were still lending livestock and demanding interest payments in the offspring of the livestock.

That I think is the origin. And then, as I say, in ancient Mesopotamia, these which had large cities and trading quite in a way, quite capitalistic and you can see that interest was used on loans, contains a sort of risk factor that people were you were using borrowing and paying interest to finance shipping ventures, to finance local local businesses and trade crafts, and also you know, for for

financing the purchase of houses. So you see that in this sort of proto what you might call a proto capitalistic society, interest is serving a number of different important functions. And my my reason for going back to that point is to is to try and underline how how important the function of interest is um if the the Yale historian William Gertzman says that the invention of interest is the most important finds invention in the history of finance

because it allows people to transact across time. And my thought, you know, when I was doing this work, is we're at a moment of zero interest and of negative interest in many countries, and that the zero negative interests with the sort of second most important development in the history of finance and possibly the most to my mind, worrying development. We're going to talk more about negative interest rates in a moment, but I have to reference the title of

the book The Price of Time. Interest and interest rates are all about being able to engage in commercial transactions over time. Essentially, that's what interest rates allow. So time has Ben Franklin says, is money. Time is valuable. Time is our most precious possession, and we must use time well. All our economic actions are taking a place across time,

and we need to sort of coordinate those actions. How much are we going to save, how much we're going to invest, what type of investments we're going to make, what valuations will be placed upon the house that we're purchasing, whether you should we invest in this country, how much risk should we take? All all these factors have an interest rate embedded in them, and um. The American economist

Irving Fisher says that interest is an omnipresent phenomenon. And really, what I'm trying to do with this book is to take this oldest of financial institutions, this omnipresent phenomenon that to my mind, had been neglected and by modern economists who who really just see interest as a lever to

control inflation and ignore these other functions. And thrust of the argument of the second half of the book is that the when the central banks focused only on using the interest to prevent the price level from falling after the global financial crisis. They neglected the impact the saving has on valuations, on the allocation of capital, on savings and pensions, on the amount of risk taking, and on

capital flows and the direction of capital flows. And in each of these other areas we see any chronicle in the book problems building up. So if you take, for instance, valuation, we just discuss you discussed earlier how valuation of the U S stock market was very high last year. But aggregate household wealth that the Fed actually gathers the data six times GDP against an average of for in a

half times GDP. And what you can see if you chart them, and I showed chart in the book, is I share the household wealth with the Fed funds rate, and each time the Fed funds rate goes down, the household wealth sort of pushes higher and higher and higher. So that's obviously a source of instability because then when you raise rates, hey press to the markets come down in tandem, where the bond stocks, everything bubble gives way

to the everything bust. So clearly, the cover of the book has an hour glass showing time slowly seeping away. How important is time to those of us working in finance and engaging in transactions where capital is put it at risk. Well, I mean it's vitally import First, I'd say time is important to all human beings. And what's called time preference, people's tendency to prefer the present to the future, to disc what we call discount the future.

It appears to be a universal phenomenon, just people. Some people are. Another way to take talking about is impatience. Some people are more impatient than others. That say, everyone has their own um internal interest or discount rate in finance. All finance is about transacting across times, load lending, investing, and so forth. It's it's absolutely essential. There's no active in finance that doesn't involve an interest rate. And I mean, I cite a description of you know, the failure of

the Soviet economy. Even if you have a Soviet planned economy, you need to allocate resources across time, and if you're not guided by the interest rates, which the Soviets weren't, you're going to have these misallocations of capital that eventually clog up the system. So let's talk about that. I love this quote. Interest rates are the most important signal in a market based economy and the universal price affecting

all others. You're suggesting because that signal was missing from the Soviet economy, it eventually crashed and burnt, Yeah, among other reasons. What I'm saying. What I'm saying is that every suscept because it's innate human, because you know, all humans are constrained by their mortality. All actions take place, economic actions take place across time that even if you didn't have a capitalist or market economy, something would need to rational to direct your resources or direct your behavior

across time. In a way, it's more explicit in a capitalist economy because you're paying a certain rate of interest on your loan, or you have a certain required hurdle rate on your investment, or you're applying a certain discount in the valuation of an asset. So in that sense, you know the time value of money. It is this sort of first thing one learns in finance. So prior to the financial crisis, I never thought about zero interest rates,

and I certainly never thought about negative interest rates. That the decade that followed that seem to have create all of these negative rates. How do they affect economies? How do they affect trade, and how do they affect the consumer? So the zero rate leads to these build ups of financial instability and at the same time contributes to a misallocation of capital. But you're not getting any yield on fixed income, so you tend to go to more speculative

Exactly the whole TEENA. There is no alternal of exact. I cite you know the the English nineteent century finance wright Award Badget where he says John bulls, you know, the eponymous englishman John Bull can stand many things, but he cannot stand two percent. And you know when people, you know, we talked about yield chasing or or carry trading when rates very low with the negative rates. Do you remember the argument negative rates was that they were

going to turbo charge the economist. This was a phrase who was by Ken Rogoff, the Harvard economist who read a book called The Curse of Cash in twenty I think twenties sixteen, where he argued, you know that you need to get rid of cash so that we could have properly negative rates. Well, the way I see negative rate is it's it's a tax on capital which is instituted by an unelected bank central bank or policy maker

without anyone, without anyone voting for it. These people who wanted us all to have accounts with the central bank, with the central bank, you know, having an authority just takes much of our capital away. It seemed to undermine property rights. But leaving aside that, where we've seen in place like Japan and Europe, there was no turbot charging of the economies. In fact, as you know, banks can't make money at negative rates and they are reluctant to lend.

This is the point that Bill Gross, pimco's formers or bond king, was making very early on in the era of zero rates. So you know, he says it's sort of created as it was like sort of you leukemia in the financial system, the negative rates that destroyed the vitality of the banking system. But he said, you know, he says, um, you need positive carry for the financial system to carry on making leans. Now negative rates makes

thing a lot worse. I mean, what you saw when the Japanese went over to negative rates in you know, there were articles in the newspaper about Japanese, you know, buying safes to store their money. And one of the large German banks also announced that it was going to

be storing cash, and then you get these absurdities. So the note, I don't think it's impetus to credit growth, but you have these absurdities like Danish home buyers actually receiving payments on their mortgages, so you're having a transfer of wealth from savers to borrowers. And then which makes no sense. No, no, I mean that we've been living in Alice in Wonderland world, you know, I mean, I think you know it's it's just a Lewis Carroll world.

And nobody. I mentioned somewhere that long dated Japanese bonds at negative yields, that some jab his life insurance guy who says that yields state matter, and people were buy buying long dated bonds a negative yields in anticipation of them going along of yields getting lower, and therefore you could get capital gains from bonds with negative yields, and

if you wanted income, you had to buy equities. How is that any different than the people buying, you know, some of the coins you mentioned, or the n f T s. You're buying a negative yielding instrument. I'll give you a hundred dollars for a century and in a hundred years give me back ninety eight dollars. How is that any different than buying an n F Take well, I mean you're right, other than you get yours. I

mean you've got the credit of the government. But look look at what happened in the guilts market recently, okay quite recently. So you had these long dated index link guilts, the one I side linker, so they equipment of a fifty year by and here in the US, but actually trading on a negative yield at last year of two

and a half percent. Been trading down for a long time this year that bond has lost its value at the trough before the Bank of England intervened to try and sort of stop the guilt's market completely blaying apart. It was it was yielding to redemption one point one. You blew of capital to end up with an asset with an expected real return held to redemption of just over one per cent doesn't sound like a great trade

to me. It was a trade that, as you know, the UK pension funds engaged in to the tune of hundreds of billions of of pounds. And to make things more interesting. They use leverage too, So there there is a sort of really a story for our times of pension funds induced to because of the low interest rates and because that made you know, affected there the present

value of their liability says your discount rate. Again, they're forced to go in and do sort of water badge that type stupid things of leveraging up these long dated bonds while at the same time owning stuff that you know would have had a higher return, but then getting into a mess. So let's talk about what's been going on around the world, and here in the United States we have inflation at its highest level in forty years. How much blame do you assign to central banks for

the current circumstances. How significant were those quantitative easing and zero interest rate policies to the current spade of inflation? What do you think? I mean, pretty significant. I think it's one of many things, but obviously a very big one. Yeah, I mean, the inflation is complex phenomenon, right, But we had massive fiscal stimulus, then the closing and reopening, but

within the long standing environment of zero for a decade. Yes, so I think you know mentioned quantity easing becoming a dangerous addiction. Initially, the quantity of easing after financial crisis was a time where the sort of financial system was de leveraging, the money wasn't really making its way to main street. Beside main street was high unemployment and so

and so forth. Um, it's different when with the lockdowns and not just the US, Britain and around the world, around the world, you had you know, I think eight trillion dollars of central bank quee or balance cheat expansion and roughly dollar for dollar increase in government spending, right,

what's it? And then you know, obviously you people were just staying at home with their stimmy checks and a they were going out and you know, buy meme stocks, having you know, looked up on wolf Street bets which stocks to be targeting and and borrowing at two from robin Hood. And so here's the question. If artificially low rates helped get us into this mess, will raising rates help get us out of this mess? Now? I'll tell you what I mean. The thrust of the book is

that you've got yourself into a paris position. Too much debt, too much risk taking, over inflated valuations, too little real savings, too much financial engineering, and too little real investment, and once you're in that position, it's very difficult to get out of it. Durber. After the financial crisis, that was commonly used this phrase kicking the can. And you know, really for the last you know, you could save. The last twenty five years or so, we've been kicking the can.

And now we've reached the point where we have in platient, as we say, and it's more difficult for the central banks to come in and kick the can any further because you know they're in danger of losing credibility. The can is kicking back. Can got bigger. It's like a sort of quantum can. Each time you kick it gets bigger and bigger and bigger, and they were now sort

of sitting under a massive can. So I want to roll back to the financial crisis because I suspect I'm reading between the lines a little bit, or maybe not so much. When we rescued a lot of the banks and then kept rates very low for the next seven eight years, we ignored some of the things we had

learned previously. When we go back to Walter Badgett, shouldn't we have taking these banks and allowed them to go to that lovely building with the columns downtown, the bankruptcy court, and allow all these banks to you know, wipe out the equity holders, give the bond holders a haircut, and clean up their balance sheets and send them back into the world revitalized like the zombie banks. We kept on life support of low rates. Wasn't fixing one problem, eventually

setting us up for the next problem. I think, well, uh, you know, the policymakers say, and central banks they say, there was no alternative, and if you criticize us, you were wishing another great depression. But in fact, actually I said, right towards the end of the book, the case of Iceland as a counter of factual, because what happened in Iceland, Icelanders went completely crazy. Yes, and you remember that that debt, with foreign debt with ten times GDP, that current gut

deficit to GDP. You know, they've completely given up fishing. They'd all turn into bankers and then it blew. But Iceland was not part of the EU say, no one was really coming to their rescue. The FED didn't offer you credit lines, dollar swaps to the Icelandic Central Bank, and so poor Iceland was just left on its own And what's interesting is they sort of followed that course that you described, and the big banks went past. They

put into receivership. Domestic depositors were protected the mortgage borrowers who interest rates went up, but mortgage borrowers were protected by giving taxation relief on their interest payments. And the foreign debt was defaulted on and currency decline. There were capital controls, but after a few years capital controls were taken off. And this is what's most interesting, is that the Icelandic economy transformed away from finance to war wards

tourism and technology as well. So you had this Schumpeterian creative destruction. The government debt relative to g d P came down, the economy within six or seven years, Iceland was growing, had recovered all its losses and was growing faster than any other European country. So making the creditors take a haircut, forcing them take out that goes back

to these ancient Mesopotamian practices of of debt jubilees. That's that they originated the debt jubilee, the giving up the writing off of debt, which also the Egyptians and the Israelites did so, and that's seen as a sort of left wing idea, but I don't think it. Essay has to be if you've made loans that are bad loans, then it's right that the creditor should take a haircut. And hence bankruptcy courts exist for a reason, right they shouldn't.

They're not just there to show off the architecture of those columns. I never, as I mentioned in the book, the insolvency rates was sort of absurdly lit. We talked about the Great Depression. The new headlines were, oh, you know, the worst financial the worst crisis, it's the Great Depression. It was called the Great Recession. And then actually you look at insolvencies, they were lower than the insolvancies after the dot com bust or the insolvencies after the savings

and loan crisis of the early You didn't get your bankruptcy. Instead, you get the zombies. And the zombies are sort of living dead, which is sort of death to a capitalist economy because they don't you know, they discourage entrepreneurs, they discourage investment, they discourage productivity growth, no doubt about that. And there are you know, ramifications and unanticipated consequences that

we're still living with to this day. Whether it's a very low growth rate that be got a rise of authoritarianism both here and abroad, you can trace that back to not allowing the banks to go through that process. Yeah,

well I do. In my chapter the book ends with it called the New Road Serfdom and the argument channeling High Friedrich High, the Austin economist philosopher, and he read a book in the Second Mold War thinking that the advance of the state during the war into the economy and into people's lives was not going to retreat, and

it wasn't really right. There wasn't a retreat. But my argument, drawing on High, is that if you take away the universal price, the price of interest that guides the captive system, then the system will fail. And the more system fails, the more the authorities have to come in to prop things up, until you get a position where you're no longer in a way have a capitalist society. And I suppose that's that that you know the juncture we are today.

Are are we going to sort of go through the problems of adjusting from the low rates to normal rates whatever you know, whatever that takes, or are we going to just shift into a sort of a different type of paradigm in which the state allocates capital and control. Saying that I'm not saying that we're going down that route.

I'm just raising the question that how it talks about people sort of stumbling progressing without really no real intention blind progression, and one senses that there's sort of been a blind progression, and no one, I mean, there's absolute clear to me that no one in any position authority considered the actual ramifications of monetary policy and of these

low rates quite fascinating. I only have you for a few more minutes before we have to send you off to the airport, So let's blow through these five questions in in a few minutes. Starting with tell us, what kept you entertained during the pandemic? What were you listening to or watching? Well, we watched Succession and we watched them the other HBO, the White Lotus, I watched White Lotus, I watched UM the you know the TV this series, A Game of Thrinds. We watched a lot of Game

of Thrinds. Tell Us about some of your mentors who helped to shape your career? Well, when I was writing Devitah miss I went to see Charles Kendall Berger outside outside Cambridge, Massachusetts. Crispino Do who I mentioned, commissioned me to do that work on the credit, which has been very useful for me. Another investment from Marathon Asset Management.

A friend they're called Charles Carter. I edited a couple of books for them on something cool, the capital cycle theory of investment, which has been sort of quite important to me. And then Jeremy Grantham at GMO has has been my mentor. I'd say that's an impressive list. Let's talk about other books in addition to what you've written. What are some of your favorites and what are you reading now? My wife and I get it into quite

a lot. And my favorite novelist is Arcane Narayan, who Graham Green said was the best writer in the English language. Now actually open, I start that book with an epigraph of from Narayan's The Financial Expert. On the sort of Indian thing. I've been reading these colonial thrillers set in Nies, Calcutta by an Indian Scottish writer called Maka g. I

can't quite remember his first name. They're pretty good, have you can't cause Bacliff Smill, the the actless Smill, you know, is the an agent scientists who who writes about energy and civilization and has written Last year I read a book called The Great Transition, and this year he's written a book about called How the World Really Works. And smills argument is, you know, it is to look at how mankind's move from one energy source to another. I

think that ye Bill Gates says he's his favorite. I don't think that's a recommendationally interesting Our last two questions, what sort of advice would you give to a recent college graduate who was interested in a career in either history, journalism or finance? Sort of almost think again. I mean, I don't think academia is placed to go into now. Journalism is much less in My grandfather worked at Reuter's.

You know, he was Shanghai bureau chief in the nine thirties, and in those days you could earn a decent live being and have a decent career and jury it's it's hard way in Bloomberg. You know that guys here have paid reasonable financial journalism pays most other journalism doesn't pay. So I probably say, if we're going to go into journalism,

do financial journalism and in finance. Huh. You know again, I in my view, I went into finance, as I say, almost cynically, it actually then became a calling for me because I actually turned out to be genuinely interested in finance and finance history. You know, people have drawn into finance because you know, people are paid better, and we've

had the financial sector growing and the market's rising. Now if we've reached a cusp and the markets are going to be not rising any future, they're actually that sort of premium that you learned from finance is perhaps not

going to be there. And I say, if I was sort of recommending so and I and said they want to go in investment, I would say, you know, are you sure your talents caren't be used more beneficially elsewhere, Because if you think you're just going to enter into this sector because you're going to be paid five to ten times more than anyone else than the average, then I wouldn't be sure that that's going to be the

case going forward. In our final question, what do you know about the world of speculation bubbles, interest rates today? You wish you knew thirty or forty years or so ago when you were first starting out, huh, well I didn't. I didn't know anything. I mean, I didn't know anything. Then it's we've been living through the most extraordinary period we knew we had. I used to think the dot

com bubble was amazing. It was until we supersized. No, I think that, And then I thought, you know, wow, I wasn't the security subprime security, so that was extraordinary. And then you know, we had, you know, the pandemic everything bubble, and you know, we have lived through the most extraordinary period in the history of finance. I had no idea that that was going to be the case when I started my career. Absolutely fascinating. Thank you Edward

for being so generous with your time. We have been speaking with Edward Chancellor, author of Devil Takes the Hindmost and The Price of Time, The Real Story of Interest. If you enjoy this conversation, well, be sure and check out any of the four hundred and fifty or so conversations we've had previously. You can find those at Spotify, iTunes, Bloomberg YouTube, wherever you feed your podcast fix. We love your comments, feedback and suggestions. Write to us at m

IB podcast at Bloomberg dot net. Sign up for my daily reading list at ridolts dot com, follow me on Twitter at ridolts. I would be remiss if I did not thank the crack team that helps us with these conversations together each week. Sarah Livesey is my audio engineer. Attica Valbrunn is my project manager. Jean Rousso runs our research. Paris World is my producer. I'm Barry Results. You've been listening to Master's in Business on Bloomberg Radio