Since the government monopolized currency and acquired printing presses, humanity has been deeply entwined with issues such as “currency inflation,” “currency contraction,” “financial storms,” “economic bubbles,” and “widening wealth gap.” In order to address these problems, governments have implemented various policies, often resulting in a vicious cycle of temporary relief but long-term repercussions, leading to a deteriorating world plagued by financial crises, economic downturns, massive debt crises, and a shadow of debts left for future generations. Natural disasters and man-made calamities are also on the rise, painting a grim picture of a world descending into chaos, where the saying “when virtue is lost, people will be near to ruin” becomes all too applicable, pointing towards the path of destruction.
This evolution didn’t happen overnight but can be summarized as influenced by Keynesianism and socialism. Keynesianism advocates for “government creation of effective demand,” while socialism stresses the “government upholding fairness and justice,” allowing governments to intervene under the guise of public policies, which now manifest as currency printing to bail out the market, quantitative easing policies, and the manipulation of interest rates, all under the banner of income redistribution policies (representing social welfare policies), leveraging “laws” to forcefully intervene, infringing on individual freedoms and property rights. Despite past trends towards liberalization and deregulation, they have often been short-lived due to the alluring and powerful nature of Keynesianism and socialism’s ideals, combined with humanity’s short-sighted pursuit of immediate gains, leading to government expansion. Even when aware of the harm caused by these ideologies, they are upheld under the guise of “necessary evils.” Unless these two theories are thoroughly eradicated, humanity is at risk of irreparable damage.
Both these theories and policies share a common trait: while they may show short-term visible effects, the “invisible long-term detrimental effects” far outweigh them.
Keynes, when introducing his seminal work “The General Theory” in 1936, emphasized that his policies of “government creation of effective demand” were only effective in the short term, famously stating, “In the long run, we are all dead!” This wise statement points out that while his policies may offer short-term relief, they come with long-term consequences – a pain that could lead to “death.” One can liken his theoretical policies to a “drug” – once addicted, there’s no turning back.
Keynes’ theory ignores the essential factor of “time,” focusing on the present without consideration for the future. He bluntly states that “savings and investment are equal,” a notion contradicting reality and common sense. Without acknowledging the importance of time, his equations paradoxically lead to results that suggest “more savings lead to less income,” a paradoxical consequence of thrift. In reality, investments are funded by savings, turning today’s savings into tomorrow’s investments. The notion that “savings drive economic growth” and “savings represent future consumption” is evident, making the encouragement of savings fundamental for a better tomorrow. The key lies in how to promote savings, where the level of interest rates plays a crucial role. Current low interest rates, and even negative rates, not only disadvantage the elderly reliant on interest income but also harm savings, deteriorating tomorrow’s prospects to a point of uncertainty.
Why then is the current mainstream view favoring “lowering interest rates”? It goes back to Keynes’ theory, where the belief in the negative relationship between interest rates and investments has taken root. However, lowering interest rates reduces savings, prompting the question of where the funds for investments come from. The answer lies in government printing money, leading to a series of consequences in society today. Uncovering the true nature of “interest rates” is a critical task at hand.
In essence, “interest rates” represent the “price” of capital and are determined by the supply and demand for “loanable funds.” Though deemed a price, interest rates encompass factors such as time, risk, financial relationships, and an element of insurance. Therefore, understanding “interest rate theory” is not straightforward but involves considering the element of “time cost.” The Austrian School of economics values time highly and holds profound and accurate insights into monetary finance, contrasting sharply with Keynesian and socialist theories. Frédéric Bastiat, the French author of “That Which Is Seen and That Which Is Not Seen” in 1850, emphasized the importance of time in comprehending interest rate theories, shedding light on debunking beliefs in low interest rates, Keynesian and socialist ideologies.
The book authored by prominent British financial historian Chris Dacle, “The Cost of Time – Revealing the Risks and Crisis of Low-Interest Rates from the History of Interest,” introduces these concepts to dispel myths surrounding low interest rates.
The book opens with debates in the French parliament in 1849 by Bastiat and Pierre-Joseph Proudhon on the legitimacy of interest rates. Bastiat warns against interest-free loans, indicating that they would be disastrous for the working class, leading to reduced business activity and subsequently lower wages. He concludes by asserting that interest-free loans are scientifically baseless, driven by hatred for existing beneficiaries and marked by class animosity and brutality.
Dacle continues along the lines of Bastiat’s beliefs, dissecting the role of interest rates in the modern economy. He argues that ultra-low interest rates exacerbate various contemporary challenges, including contracting productivity growth, soaring unaffordable housing prices, deepening wealth inequality, disappearing market competition, and fragile financial systems, ultimately fueling the rise of populism.
The book is divided into three parts. The first part delves into the history of interest rates, tracing their origins to ancient Mesopotamia and exploring their development through the ages, from Medieval times to the birth of capitalism in Europe. The text explains why interest rates and capitalism are closely intertwined but have always been viewed with fear of excessively high rates. In the seventeenth century, Sir Dudley North vigorously promoted low-interest rates in England, a stance refuted by the eminent liberal philosopher John Locke. In the early 18th century, John Law introduced paper money and reduced interest rates to 2% in France, a bold monetary experiment that ended catastrophically, yet predicated the adoption of ultra-low interest rates and quantitative easing by modern central banks.
By the nineteenth century, some financial analysts had discerned a positive relationship between speculative fervor and low-interest rates. Present-day central bank officials are concerned about inflation and deflation, aiming to stabilize prices, yet over the past century, credit bubbles have occurred during periods of subdued inflation. These episodes, including the credit boom of the 1920s, Japan’s economic bubble in the 1980s, and the global credit bubble of 2008, have invariably led to disaster without inflation, encouraging central banks to maintain rates below economic growth levels, yet resulting in calamity.
The second part of the book dissects the unintended consequences of ultra-low interest rates, leading to even lower rates. The third part examines the impact of ultra-low rates on emerging markets. Lowering rates to zero initially propelled capital into emerging markets, causing a surge in commodity prices, triggering the Arab Spring uprisings in the Middle East due to soaring food prices in 2011. Years later, the Federal Reserve’s tightening policies led to a collapse in commodity prices, plunging emerging markets into a slump. Brazil and Turkey faced severe recessions, while China experienced a massive credit boom fueled by low-interest rates and accompanied by the largest investment frenzy and epic real estate bubble in history.
Dacle advises readers that interest is an intricate subject, recommending essential readings such as Eugen von Bohn-Bawerk’s “Capital and Interest” and Irving Fisher’s “The Theory of Interest,” while cautioning against Keynes and his followers’ works. He advocates reviving the Austrian School of economics and their belief in the “natural rate of interest,” determined by the supply and demand of deposits, as the key to understanding the market rate.
As the book advocates, “interest is necessary to guide capital allocation; without interest, investments cannot be evaluated. Interest serves as a ‘reward for abstinence,’ stimulating savings. Interest is the cost of leverage and the price of risk in financial operations. With interest, excessive risk-taking by bankers and investors can be curbed. From the foreign exchange perspective, interest rates balance capital flows between countries and impact income and wealth distribution.”
In line with Bastiat’s sentiments, ultra-low interest rates benefit the wealthy who can access credit more than they do the poor. Time is valuable, and interest exposes the essence of human nature: impatience. Even before currency was invented, people engaged in borrowing and lending for interest. While high-interest rates are commonly deemed harmful, excessively loose monetary policies lead to financial turmoil. Today’s ultra-low interest rates have resulted in severe economic fluctuations, weakening the financial system – inflated asset prices, sluggish economic growth, exacerbated social inequality, rampant zombie companies, rising national debts, and pension crises. Humanity is marching toward “The Road to Serfdom,” as described by Hayek in 1944.
As Emperor Tang Taizong once said, history serves as a mirror reflecting the rise and fall of civilizations. By learning positive lessons from history, one may reclaim the future that seems to slip away. The book, “The Cost of Time – Revealing the Risks and Crisis of Low-Interest Rates from the History of Interest,” enlightens us on the importance of interest rates and the potential for destruction posed by lowering rates. Rejecting current misconceptions and policies can pave the way for sustainable development, turning dreams of a better future into reality!
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