The Price of Time: The True Story of Interest by Edward Chancellor has generally been very well reviewed (see here and here for example) but unfortunately did not catch me. It has a message, hammered home in each chapter (organized more or less chronologically): that an interest rate that is too low (lower than the natural rate) is harmful. As a microeconomist looking at the consequences of massive QE lately, this seems a compelling argument. The case is easily exposed in a section discussing John Locke’s point of view (p43 – I’m paraphrasing a bit):
- financiers profit at the expense of “widows and orphans”
- there is a redistribution of wealth from savers to borrowers
- There’s no reward enough for taking risks
- bankers will hoard rather than lend
- Too much debt will be incurred
- money will seek higher returns elsewhere
- asset price inflation will make the rich richer
- low rates won’t boost the economy anyway
As someone who has been taken aback by the macroeconomic argument that an abnormally low price will improve the functioning of credit markets, these points make sense to me. The essence of the delivers consists of illustrations of these different points using past and present examples. It’s a polemic: it claims that low real rates have caused weak growth, asset price bubbles, high debt and financial fragility.
But I don’t thinkhe delivers really grappling with how to reconcile the micro (interest rate as market price) vs macro (interest rate for demand management) dilemma. Keynes is portrayed as a disbeliever in a natural rate of interest and dismissed as someone who never missed an opportunity to argue for lower rates. The book also fails to explain why real interest rates (and therefore presumably the natural rate) have fallen for centuries, even millennia (see this Bank of England Working Paper). It also didn’t help me think about how to reconcile the short-term market-clearing role of interest rates with the long-term Ramsey formula that would now give us a low social interest rate (if you take it seriously, a zero rate of time preference to respect the moral equivalence of future generations, plus an elasticity multiplied by a long-term growth rate close to zero).
So while I largely agreed from the start that monetary policy had been too accommodative for too long after 2008, I ended that feeling as if I had been bludgeoned, and always with unanswered questions about the interest rate. But that has to be me, given the uniformly glowing reviews.