The man who called every MARKET CRASH since the Tech Bubble says this is a BUBBLE!

The Price of Time: Unravelling the Mysteries of Interest, Markets, and Human Behaviour. Join us for an insightful discussion with Edward Chancellor, a renowned financial historian and author of The Price of Time. We explore the philosophical and historical foundations of finance, the misconceptions surrounding interest rates, and the unintended consequences of monetary policy decisions.

Key Topics

• The importance of philosophy and history in understanding financial markets versus reliance on mathematical models
• The concept of reflexivity in markets and the limitations of physics-based analogies
• The real story and implications of interest rates, natural rate of interest, and the influence of central banks
• Historical lessons from Locke, Keynes, Law, and Minsky on speculation, bubbles, and financial stability
• The role of interest rates in economic demographics, inequality, and the ripple effects on society
• Unintended consequences of ultra-low interest rates and quantitative easing, including bubbles and misallocation of capital
• The impact of easy money on technological advancements like AI and the predictability of market shocks
• The significance of courage and contrarian thinking during financial crises

Timestamps

(00:00) - Welcome and introduction to Edward Chancellor
(02:30) - The role of philosophy in finance versus mathematics
(07:15) - Feedback loops, reflexivity, and market unpredictability
(12:00) - Understanding money, time, and the essence of interest
(17:45) - The natural rate of interest according to Locke and Hayek
(23:55) - The impact of monetary policy on demographics and inequality
(29:20) - Unintended consequences of low interest rates since 2005
(35:15) - Historical bubbles: Mississippi, South Sea, dot-com, and credit booms
(42:10) - The irrationality of models and the importance of history in economics
(49:20) - The influence of easy money on innovation, AI, and speculative bubbles
(55:30) - Contrarian thinking, courage, and investment strategies for the future

Resources & Links

• [The Price of Time: The Real Story of Interest](Amazon link)
• John Locke's writings on usury laws
• George Soros on reflexivity
• Hyman Minsky's Financial Instability Hypothesis
• Grant's Interest Rate Observer

Connect with Edward Chancellor

• Twitter
• LinkedIn

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Transcript

SPEAKER_01 0:00

You know what AI is very good at doing, it's very good at cribbing, it's very good at copying what's out there presenting it. Lots of students are using it to write their blasted essays. I think it puts the premium, you know, we were talking earlier about thinking outside the hut. Think trying to think differently. It puts a premium on not doing and not thinking in exactly the same way as everything else.

SPEAKER_00 0:36

Welcome to the most important thing. The podcast where leading voices in finance, economics, investment, and geopolitics share the one idea they believe matters most. Renowned broadcaster Ivan Yeats and finance expert Dr. Alan O'Sullivan will uncover for you what actually matters. In a noisy world, clarity is power. Here, we focus on the principles and insights that endure long after the headlines fade. This is the most important thing.

SPEAKER_02 1:07

On today's episode, we're off to Somerset in England, lovely part of the world. And Alan's interview is with Edward Chancellor. And he has had a long career in the States and is another financial historian, journalist, and analyst. And I've actually heard of this guy through his uh Financial Times column.

SPEAKER_03 1:29

Yeah, so so Edward, or Eddie, as he's known to friends, is a very interesting character, okay. Uh very well respected financial historian, uh, has wrote some very well-known books, most recently, The Price of Time. And our discussion was primarily on the price of time in terms of how important interest rates are. Uh, and perhaps maybe not for the reasons you think.

SPEAKER_02 1:54

Yeah. And and interest rates, the the main interview is about interest rates, how central banks, the Fed, the ECB, uh, Bank of England regulate interest rates. And, you know, we had two decades of very stable, low inflation. You know, the cost of money was very low and the return to depositors was very low. But since COVID and Ukraine, all of that has changed. Are his lessons to be learned in relation to interest rates actually nothing to do with circumstances but to do with time?

SPEAKER_03 2:29

So the principal takeaway that I got from the interview with Edward was that people represent our their understanding of interest rates is wrong. Okay, they're talking about the price of interest. But really, val the price of time is the most important commodity all of us have is time. We have scarce time, okay? We have a finite uh number of years on this planet, right? So, whatever way we look at it, time is discounted into most financial uh metrics that you look at. If you're valuing an asset, you have a discount rate, you're discounting that by time. So the further you have to wait until you get your uh return, you know, the more the more you will you you will look for that, the more you look to be compensated. So time goes into most uh elements of finance, economics, investments. So that was his main takeaway.

SPEAKER_02 3:23

Well you see, I'm I'm thinking that, and I'm I'm listening to him there, and then I'm reflecting that if I take out a 30, 40-year mortgage, it'll probably be uh lower than the prevailing retail interest rate. If I buy a 10-year, a 20-year treasury bond, so like what what I would have thought is over time we're talking discount.

SPEAKER_03 3:45

Yeah, that's it. I mean, the the basic principle of of finance is that you're deferring gratification, okay? So if you're going to invest in something above the risk-free rate, what's the risk-free rate? Let's say a 10-year German bund or a 10-year US Treasury bond, uh, you should be compensated for that. So you should receive a premium above that rate. That's time. Because, you know, why wouldn't you just leave your money on deposits? So you should be rewarded for not spend not receiving that that capital for the time. That's that's the basic. But surely you should be rewarded for your appetite for risk. That's yeah, they're not they're not uh mutually exclusive. There's time, uh, deferred gratification, but also risk. So this is premiums. We'll get into another uh important subject later when we talk about layers of risk.

SPEAKER_02 4:38

Like the first thing in investment uh and wealth consultant would say to you, well, Ivan, what is your appetite for risk? Do you want to ensure there are no circumstances you lose your 100,000 euros, or you know, uh have you got actually an appetite for risk? Is that not a fundamental of investing?

SPEAKER_03 4:57

Appetite for risk is only half the story, right? There's a there's two things appetite for risk and capacity for loss. Appetite for risk assesses your psychology. Okay, so if you're in put the client in the Monday morning, if the markets are down 50%, marinate in that for a while, how does that feel, right? Capacity for loss points to what Chancellor was talking about, time. So if you're down 30% but you're only 30, that's not a that's not as big a problem as if you're down 30% and you're 60. So there is a distinction there, and time is at the center of it.

SPEAKER_02 5:30

Enough of our preamble. Let's take a look at this conversation between Alan and Edward Chancellor.

SPEAKER_03 5:43

I'm delighted to say that joining me now as a guest is Edward Chancellor. Edward is a renowned financial historian, journalist, and investment strategist. Very welcome, Edward. Oh, thank you for having me. Reading your book, The Price of Time, and and I suppose the purpose of this podcast is the most important thing, and we'll get to that uh shortly. But the more I I study financial markets, the more I realize that it's uh having a good understanding of physics is very, very important, but also philosophy. And it was amazing the list of characters you have, John Locke, John Law, you know, even I spoke with um Lacey Hunt recently, David Hume, David Ricardo. Is the problem in the current day that there isn't as much emphasis on understanding philosophy as opposed to mathematics and the science of investment?

SPEAKER_01 6:33

Yeah, you could say that. I think it's a pretty accurate statement. And I'm first of all, I'd say you you mentioned the importance of physics for understanding finance. Now, as as you know, there's a whole sort of branch of of quantitative finance, and the firm I used to work for in Boston uh was largely full of uh of of quants, as we call them, who you know, many of whom had degrees in in and PhDs in physics and maths. Uh I come from a different background, which is uh as training as a historian. And in as you note, in in the recent book, um you know, I I draw on some of the heavy phil philosoph heavy hitters in the history of philosophy uh to make my argument uh Locke Hume, John Maynard Kane's you know, both philosopher and economist. Um and I I think the problem today actually i i is um that both the practice of finance and the academic study of history of of eco of economics is actually t o is is too mathematical, too much relying on a false analogy between finance and world of physics. Now, um I I I don't think I mean physics and models have their place. I don't think they have a a good place or or reason they shouldn't be they shouldn't predominate i i in the social sciences because you're dealing with human beings and uh human beings you know uh um act in their own strange ways, and they also humans act with with feedback loops. So what happens in financial markets is inherently unpredictable. And and uh George Soros, the the um the hedge fund manager, also sort of quasi-philosopher, uh um trained you know under uh Karl Popper at the London School of Economics, uh he he, as you probably know, uh has a theory of what he calls reflexivity, uh, which is the the mere act of observing the market actually changes the outcomes. So and i if you accept that notion of reflexivity, um then you can see that um the sort of the n applying physics i i or the phys physics way of thinking to markets is going to lead lead you astray. If there are, you know, there there are there are fields probably more relevant, but such as chaos theory or or complexity theory that build on uh the notions of of uh of feedback and and and complexity. And I I'm more in tune with with with those notions. I've always intuitively understood what Soros was saying about reflexivity. And I think you know, in fact, a l a lot of people who are actually active in the markets think that way too.

SPEAKER_03 9:43

I mean, some of the best books you read uh force you and challenge you, okay? And the price of time really allowed, challenged me in many ways in terms of how I perceive financial markets and particularly how I perceive interest, okay? So the title of the book is The Price of Time, um, the real story of interest. But if we kind of scale it back, Edward to money, okay? So what is money? The the definition is the the three, you know, the unit of account, uh medium of exchange, and store of value. So I don't think you can have money without this store of value. And how do you have value without time? So I suppose my my question is, is is the biggest reward in finance patience as regards time? Because if you don't have time, you don't have store of value. If you don't store store of value, you don't have money.

SPEAKER_01 10:37

Um well, first of all, so with money, um money money is used in transactions. Uh and you know, in in in principle, it should also be a store of value. But as you know, with our own currencies, they're not great stores of value, but they still, you know, ha have you know uh perfectly effective um for for transactions. The point I'm you know one of the points I'm trying to make in my book is that all economic activity, financial and economic. So you could if we say financial is an economic activity which involves money, but it's also true of any economic activity that doesn't involve money, such as BAT or whatever. Everything the transactions take place over time, and that the time is um a vital aspect of the transaction. You can't you can't you can't build a factory and and and hire people and produce goods and sell goods i in an instant. It it all takes time. And we need what we need is something to to place a value on time, because t time i i i i is the most important aspect of economics. Now, and i I remember when I studied economic I didn't do undergrad uh undergraduate degree in economics, but I studied at school, is is uh economics is is I remember being talking, it was about the allocation of scarce resources, and um time is for for us, humans, a um uh a scarce resource, and and we need to price it and and and and the and the price is is interest. And and and that, as I say, is is not just financial, it's not just about lending money, it's about you know in in in a non in a world without money, we would still have a value of time and we would still have uh an i an implied interest. And one way of say thinking about it this way is that if you buy a a durable good, in other words, something that delivers its service over a period of time, you're making a one-off purchase, okay? Uh you know, you let's say you're buying yourself a car or piano, you name it, but that good is going to deliver its service over a period of time. And the price you pay will actually reflect, from a theoretical perspective, the discounted value or utility that that good delivers to you over that period of time. So you don't need money in order to actually have an embedded interest reflected in what you do. Yeah.

SPEAKER_03 13:25

So there's a lot of talk at the moment about R star or this equilibrium rate. Um, in economics, I suppose that's where uh you don't uh slow down the economy and you don't have too much too much inflation. But something that jumped out to me as well was that you know the school of maybe economics you come from, Hayek, says that we need what he called good deflation. So, you know, if so our star isn't the same as the natural rate, and we're back to physics again where if we're if we're manipulating the natural rate, we don't get creative disrupt uh you know creative destruction as as Schumpeter called it. And it's and it one thing if something is not natural, it obviously leads to problems, which is what a big part of your book.

SPEAKER_01 14:12

So let um take back a time. So as far as I understand, and I may have this wrong, but the first time I came across the notion of what you might call a natural rate uh was actually in the writing of John Locke in the late 17th century. And I think what he's referring to then is a rate of interest that is not influ is not he's specifically writing about the usury laws. In Britain up until the um until the 1820s, we had usury laws that that dictated the maximum rate of interest. And law people were um in in the eight late 17th century, they were trying to push down the the uh maximum uh interest charge. And l and Locke was saying no, he was he was the first person to uh observe or or to theorize what the problems would be if you uh if you put uh if you if you set an interest rate wa that was different from that that would be dictated by the market, to use later words, but what he called the natural rate. Now uh the economists i i you know from the early 20th century onwards started to talk about a natural rate and this uh rate of interest, and this would be a rate of interest in a world without finance. In a way, but it's not so different from what Locke's saying. In a world of sort of theoretical world of barter, this would be the prevailing natural rate of interest that would be determined by supply of savings and and and the um and the demand for investment. Now, since time of Locke, we've moved to a world of ethereal money, no longer backed by gold and silver, as in Locke's day. And what happens then is that the central bankers have to have you know have have a prime role in determining the rate of interest. Now they the way the only way they they can uh guide themselves to what the correct rate of interest is, is the is the rate uh of of inflation or deflation at the time. And n not just at some stage in the future, because that's uh you know difficult to to guess, but well you know, how whether inflation is running hot or cold today. Now uh the point Hayek made, uh and he made this point a century ago, is that the rate of um whether inflation is whether you have inflation or deflation doesn't give you a very clear insight into the uh return on capital within an economy, or or or you know what you might say, you know, the the natural rate. Uh because you know you might be living through a period a as as it was in the 1920s, where America has in the case of America, you had very strong productivity growth because of all these inventions, electrification, radio, cars, and so forth, and the economy was naturally running very hot, and that and the impact of innovation is to is to bring prices down. In other words, to to deliver what we call, you know, what what what what the economists call deflation. Now, there's nothing there's nothing wrong with that deflation, but the central bankers can't quite handle it because they can't really distinguish between the good deflation from productivity gains and the bad deflation that comes when you know the financial system blows up and and everyone loses their job and and asset prices fall and people go bankrupt and the money supply starts contracting. So that was the point that Hayek made um then, and I think it's a correct point. Um and um when you go back to what happened after the global well, both before the financial crisis, we had low, low interest rates in the US, tremendous credit boom, tremendous bust, and then we had even lower interest rates. So I was really writing uh my analysis of, you know, at least part of my analysis of what happened after the global global financial crisis was was inspired by by Hayek's observation that that the m the presence of deflation or deflationary forces was not in itself necessarily a bad thing. And that the central bankers who fixated on deflation uh or the absence of uh of inflation were being misled as with regards to what the correct or natural rate of interest was. I s and my my point um which I think has been vindicated, is that we we can't know the natural rate of interest. In fact, actually I after I'd written the book, someone told me that there was a a 15th-century Spanish school of economics, which is called the Salamanca School, uh who and they uh they argue that the that the fair price and the fair rate of interest is something known only to God. And I think it's probably true. You can't put your finger on it. Now, since um but of course, you know, the you your you know your um your your contemporary uh monetary policy maker with his sort of physics-inspired tools and models, uh w likes to to to delude themselves that they've actually identified the natural rate. And and uh by by you know linking it to inflation. So then in 2021, 22, inflation surges and they go, oh, hang on. Um perhaps the natural, you know, we thought the natural rate was, I can't remember what they were saying. Let let's say they thought the natural rate was, you know, well, close to zero. And then now they suddenly say, well, actually natural rate is is close to two percent, um because they unleash the inflation. Well, I you know what can one say that you know go back to Salamanke, the the natural rate is known only to God.

SPEAKER_03 20:13

So j just coming back to the global financial crisis, Edward, and maybe moving into some of the unintended consequences. So uh you mentioned Hayek there, but I know John Locke in the 17th century, you know, in your book that he was talking about the unintended consequences, negative impacts of uh low, ultra-low interest rates and low interest rates. Here how how did Ben Bernanke not see this? Obviously, very educated, he knew knew about what was these people know what's going on.

SPEAKER_01 20:45

I used to wear this fellow um called Jeremy Grantham in Boston, well in Vesta, and he he once wrote about Ben Bernanke uh that he he he was a person who'd who'd read the history of the Great uh of the Great Depression and and learned all the wrong lessons. Um now um I would I'd be a bit har I might even be a tiny bit harsher. Uh and and I and it's this is not a problem I think that relate that relates specifically to um Bernanke. So it's not ad hominem, because you know, Bernanke is just representative of of a particular contemporary school of when thinking about economics and and and um and and monetary policy. Well, first of all, modern economists, and go back to what we were saying earlier, they're you know, they're o overly mathematical to my mind. Every everything is about is about making these equations and creating models. Um and then I think that they haven't really studied a great deal of financial history. The the Great Depression is is an exception, because it it is well studied, and Pananke wrote a few. Essays on the Great Depression. But the great gamut of history. And as you know, I, for instance, have a chapter on John Law in the Mississippi Bubble, who was operating in France in the late 1710s. And he was a central banker in sort of among other things, who manipulated the French interest rate, Dan, and created a great speculative boom and eventually and pretty soon an inflation. And what's interesting is that the modern central bankers emulated law without really quite understanding, you know, without really following through that actually, law, brilliant man though he was, uh, his whole um project, his system, as he called it, uh was a tremendous failure. So I think that that's you know that that's one problem um that Bernanke and others have. The other is that they and this goes back to again what we're talking about, is that they don't study the history of economics. They I think there is because they view uh economics as a science, they consider that it moves continually forward, that it progresses, that that that that the contemporary canon of economic thought contains you know all there is to know about economics and that all error has been purged from the system. Now, actually, you see, one of the problems with that is that they don't really have anything they've sort of lost they lost any understanding of the key importance of interest. Because for the in their models, interest is rather abstract, it's set by um societal time preference, again, something you couldn't know, and um is known solely by um, as we discussed, you know, by by whether it's inflation or deflation. And and and that interest is merely for them a tool, uh, a lever that you control uh to um to control inflation, deflation, and also to uh to can you know to control the economy, insofar as whether it's you know overheating or or or underheating. And and I and and if you look at the history of interest, of writing, of the great economist writing on interest, you know, Hume and others, uh, you see there's actually a huge amount to the topic. But that but no one when I started this book, I went to see um this friend of mine, Jim Grant, uh financial historian, journalist, and the editor of Grant's interest rate observer. And I said, has anyone I was bemused by these um ultra-low rates um uh and um thinking about them and you know, working for an investment firm. So we were saying bond yields were extremely low and and and asset prices appeared distorted by the low interest rates. I said, Jim, you know, has anyone um written about this? And he said, Yeah, I he said he thought about it, and he said, Yeah, I think you know this this guy called Conard wrote a book about interest in the 1960s, and um but I didn't find it very useful. And then I read um uh a predecessor Austrian economist uh to Hayek called Eugen von Burmbach, who was um sort of second generation at the so-called Austrian school, and who was uh Austrian finance minister for a couple of times, he wrote a um uh uh a a large book on the theory of capital and interest. And in it uh he writes the the subject of interest has has has long uh has long suffered from contemptuous neglect. And he wrote that, I don't know how you said, let's say around 1870. I'm writing in my book, uh nearly you know 150 years later, and that neglect, if anything, believe it or not, had become more contemptuous and more extreme. I'm not a, you know, I don't work in academa, thank God. Um but I I would say you know the way to um you know the way to uh rectify uh some of the errors uh of economics and the and the the great uh misunderstandings of modern economies is you know a bit I you know frankly a bit more history and a bit more history of the the theory of economic thought. And if you go and I was thinking the other day, you know, and I I've been when I've been writing myself for rough 30 years. And um during that period, you know, we've had um we've had you know three I mean you could say we've had millions, you know, we've had, you know, obviously it doesn't, you know, very interesting time in finance, but we've had three, three pretty epic events that were not uh anticipated or observed by the uh monetary policymakers uh and and the economic policymaking establishment and the academic economists. And that same you you start with the dot-com bubble and and boom and and the, so to speak, inevitable bust. They sort of miss that. And they miss that because you know they were imbued with the idea that markets were efficient and reflected uh all available information uh in a rational way, and that speculative bubbles were therefore impossible to predict, a sort of quasi-miss. Again, something that is pretty obviously false if you read a tiny bit of history. Um they would see the um the you know the Great Bubbles, Mississippi John Law's Mississippi Bubble, South Sea Bubble, 1920s bubble. They see them as sort of anomalous events, um, weren't weren't particularly quaint, you know, um sort of little stories to tell your child to tell children, not for grown-up study. Then you went into the you know, credit boom, uh uh uh which uh, you know, as the Irish, you know, they they you know was pretty pretty pretty pretty mighty credit boom. Uh and uh and there, you know, credit booms, you if you have low interest rates, you you you tend to engender the growth of credit, yeah, naturally not because you know interest is a cost of borrowing. So if you have strong credit booms, and in particular, if you can combine that with a real estate boom, and in particular, as the Irish would know, if you build a whole load of houses at the same time, you are setting yourself up almost certainly, at some stage, for a severe bust. But no, they couldn't, that was, you know, beyond them. Why was it beyond them? Because, you know, oh, there's nothing wrong, first of all, because there was no inflation at the time, so there was nothing to worry about. Secondly, because they had a sort of I mean again, it's sort of laughable to think about it, but they their view of credit, and it's not a rare view, is that, oh, for every borrower, there's a a lender and it nets itself out. So actually, credit is not important. And then as for the you know, real estate prices, and uh, you know, those just reflect fundamentals, and as for you know, building booms, so those reflect demographics. Even though, as you remember in Ireland, there were a whole load of people coming into Ireland to build houses because there was such a boom going on. Anyhow, so then we run, you know, and and then and there were you you mentioned that that that I got an award for uh a um an essay I wrote called Ponzi Nation. And I that that that was an essay in which I sort of drew uh upon uh the works of this economist um called called Hyman Minsky, who who who died in the in the 1990s. But Hyman Minsky had this very sort of interesting view about the dynamics of boom some bus, about how stability engendered instability. And this period before the global financial crisis was the period of the so-called Great Moderation, where everything was was, you know, no inflation, strong growth. Well, yeah, no inflation, amazingly strong credit growth uh that was dragging the economy uh along with it, but actually building up to financial uh fragility that was leading to the bus. So again, that that and and Minsky, heterodox economist, completely ignored by the financial by the by the acad by the academic establishment at the time. His reputation recovered in 2008. But you know, Min Minsky, although he was taught by another Austrian economist, uh Joseph Schumpeter at Harvard, he he did he was never given a job at one of those Ivy League colleges. I mean, you know, Bernanke came from Princeton, he was head of the economics department. Uh Minsky was sent off to a relatively obscure university of the uh University of George Washington in St. Louis, Missouri. Uh and and and you know, if you I asked, you know, when I was writing um the the Crunch Time for Credit is a long report. And when I was working on that, it it contains it has a bit of hayek um about the effects of manipulating interest rates. It also has quite a lot of of Minsk in it. And I w I saw an old a very sort of wise old Wall Street economist in in um New York in about 2005, who'd read my report, he gave me lunch. I said, you know, why why do um why doesn't anyone pay attention to Hayek and Minsky? And he said, Oh, they're difficult to model. And that that now this goes back to your math, you know, my the problem of the physics is if you have a world in where if you have a a discipline in which all the best insights are difficult to model, then obviously that discipline is going to make tremendous errors. I um I was talking to another economist, you know, academic economist at Harvard, who said that George Soros had come to talk to the economists uh at Harvard and at MIT about his theory of reflexivity, of the act of observation and acting upon the observation changes the underlying reality. And apparently he gave the talk, and Paul Samuelson, you know, the most lauded um economist of the sort of post-war period, apparently the end of Soros' talk said, I don't know what the hell he's talking about. There you are. Um yes, and then finally, um yeah, what what did they miss next? Well then then mixed the miss the the return of inflation. Now, I mean in in in you know 2020 21 US money supply was was growing by about 30% a year. You know, central banks around the world, you know, you remember COVID, they were just the you know the governments were borrowing, I think they roughly, you know, the I think this the Western government they borrowed around they they borrowed and spent around eight trillion dollars in aggregate, and and and the central banks expanded their balance sheets by about around about eight trillion and the um and the money supply stored and the central banks they they didn't see it. But you know, if you go back to the history of the history of of inflation, you go back to Copernicus, and you go back to Jean Bodin in the 16th century, they you know inflation all the early writings on inflation were about how it was how it came about by the debasement of of the money or or the growth of the money spectrum. Now, I look I know that the you know that there isn't a fixed real you know, it's difficult to define what money is, and there isn't a fixed um, you know, there isn't a f uh a settled relationship between any measure of the money supply and inflation. But you know, by you know, frankly, you know, by 2021, money supply was growing, the broad money supply was growing so strongly, uh, and any of you know all the monetarists were saying, you know, hey, we're gonna get an inflation, and the you know, the establishment economists got that wrong. So that's you know, if you think about it, so they couldn't spot the bubble bubble. They couldn't spot the credit boom and the build-up of financial fragility, and they couldn't spot the inflation. And yet these guys, you know, they they're all tenured, they all have, they all, you know, they they run the money, you know, they run the central banks, they never admit, well, they they hardly ever admit their errors, uh, they learn very slowly by their mistakes, as as their, you know, they they it's too much to jettison the body uh of knowledge, the models that they've staked their reputations on. And um, you know, as Max Planck said about physics, that you know, physicists, you know, the science progresses with the death of one scientist at a time. I mean, that's you know, the paradigms are so powerful, they're difficult to shift. Even the global financial crisis didn't um didn't change the paradigm. If you think about it, there was there was Bernanke, and I again I don't want to single out Bernanke, but there he was. He was um, you know, he he completely misunderstood, misread the situation going into the global financial crisis. And um, you know, the time of the global financial crisis, on the Federal Open Markets Committee, there was not one single person on that committee with practical banking experience for the first time ever. Can you believe it? I mean, it's isn't that extraordinary? Anyhow, so all academics, including this guy called Frederick Mishkin, who was meant to be America's foremost expert on credit, who'd previously gone off to Iceland of all places. Iceland, a country that was running 25%. 25% current account deficit, whose whose whose whose debt to GDP ratio gone up to 900%, that made Ireland look like the most prudent country on earth at the time. And Frederick Mishkin gave it a clean bill of health. Can you believe it? Anyway, so Bernanke, after the financial crisis, is reappointed, sprays, you know, a lot of money uh around Wall Street to lift the boats, and is appointed, you know, time person of the year. And and you know, one doesn't see, at least I didn't see, any real change or intellectual evolution or Bernanke. Now, you know, who's a different case in point? And more I think intri a more interesting figure is Mervyn King, who was the um governor of the Bank of England going into the global financial crisis. Now Mervyn King and the and the and the Bank of England, you know, they were I don't know if um King came up with the term, but there was this facetious term called nice. And we were this was meant to be a nice economy, and it meant for uh non-inflationary consistent expansion. So you could say, you know, yeah, the Bank of England was extremely complacent running into the crisis. But I think that um you know that that that the King in particular learned from that experience, and you can see uh an evolution in his thoughts. So um yeah, so as I said, you know, some a few people learned a bit, but um, you know, it wasn't that evident, you know, broadly.

SPEAKER_03 38:28

The Most Important Thing podcast is sponsored by Priya Wealth Management. For those watching or listening who are serious about building, protecting, and structuring wealth, professional advice can make a meaningful difference. At Priya Wealth Management, we work with individuals and families who want a considered, discrete, and highly personalized approach to investments, pensions, and long-term financial planning. If you would like to discuss your own circumstances in confidence, you can book a call directly with me using the details in the show notes. Now, back to the show. I'm gonna mention another central banker that you quote another very prescient uh central banker, Rajaram Raghan, um Indian central banker uh Let Them Eat Credit is one of the chapter titles. And this maybe introduces, if I can say, some of the more sinister perhaps motives is the wrong word, but tactics, policies, perhaps, insofar as you know, there was a recognition that growth was slowing, productivity was slowing. Let's what what fills the gap? Maybe credit to keep the proletariat, you know, happy. Um maybe I could be bold to say that, but you know, maybe speak to that, Edward, a little bit in what you're talking about there.

SPEAKER_04 39:46

Um I didn't know quite sure.

SPEAKER_01 39:48

I can't quite remember the year that um Rajam made that comment, it was sort of round 2004. Uh uh I think that what inspired you, as far as I remember, is that in in the prolonged period, um from you know from roughly a sort of thirty-year period from the mid-1970s, there'd been very little real um real income growth in the States. And and I think particularly in the early 2000s, um there was in the in in the US massive loss of manufacturing jobs uh as China came in and and you know ate the American manufacturing industry. And I think Runya Rajran's sort of you know slightly jokey comment was that in the um in the absence of real income growth you you know the populace could be satisfied with with credit growth and and and and and low interest rates. But the trouble was that this wasn't gonna last because yeah, you know, you you can borrow at low interest and you can encourage this you know fecklessness, you can lever up your house, you could take out loans of in the in you know before the crisis, you could in the States and even in Britain, you know, with Northern Rock, you could take out loans of 125% loan to value. Uh in you know, in Ireland places you could flip properties and speculate and make money in that way. But but you know, that sooner or later is a reckoning, and then the debt has to be repaid. Now, if you have a financial crisis, then you're going to have abrupt credit transaction, all those bubble-type activities, the home building, lending, so forth, real estate jobs, uh are going to be threatened, and then you know, all the sort of secondary expenditure, uh luxury spending this and that. You know, so the whole economy then becomes formed around the the you know the bubble, uh you you lose start losing a lot of work. And and then you know, what's the upshot of that is is you get very high unemployment and uh and potentially uh severe down downturn. I mean I think you know US unemployment reached 10% uh after crisis. Well, Ireland's war uh um I think youth unemployment in Spain, as far as I remember, was up at you know 30% or so. So um yeah, so let them eat credit was not a it was it was not a sort of stable equilibrium o over time, uh unfortunately. And can I can I just add one other point, is that after the crisis they pushed interest rates down. Now the that because the households had eaten too much credit and were feeling a bit queasy, the the wealth they they on the whole were paying down their debts. And in various places, you know, corporates and in particular governments were um ramping up their borrowing. But the problem with the ultra-low interest rates after the crisis was not so much that they engendered uh um people to borrow too much, but they um but they pushed up the um the cost of things that uh you know uh that that that give people security uh in their lives. Um you know how house prices were inflated by the ultra-low rates. And like even Ireland, you know, I mean, you know, we're what? Um we're we're 17 years on from the financial crisis. And the Irish now like to complain about nothing other than um the high house price, don't they? Um and you you know you've got you had very high you know, all around the world you pushed house prices up to very high levels. The very high interest rates gave very low returns on savings, you know, in particular in bank accounts, which meant it was very difficult to build up a nest. You know, you talk to anyone, you know, younger generation, and you know they were obviously having a hard time. um build you know bit building up a nest egg to buy one of these inflated house prices. Very low interest rates push up um push up the cost you know the the cost of of of acquiring an annuity of saving for your pension. So and and then the ultra low interest rates, as I argue in my book, they they actually, rather than stimulating the economy as as as Bernanke and others believed, yeah, they they they they stop the financial crisis, this financial system collapsing, fair enough. But they um in in my view they um they lead to a misallocation of capital and that they slow the temper of economic activity and therefore they actually um they actually prevent the economy from rebounding as rapidly as it would do otherwise. In the old days we used to think of these periods of crisis and panic so like a throwing a rubber ball on the ground and um and the so the harder you threw it the quicker it would come back. But once you sort of and because those crises tended to occur at at you know in the 19th century and so on. They would occur at periods when interest rates were very high. So you know all the bad assets would be liquidated now it was like sort of you know throwing jello on the granny like you know you throw it down and just stack the stuck there. And the importance if just on the theme of of you know of of inequality or popular dissatisfaction is that all that feeds through into low income growth. And so if you combine you know high house prices, uh you know low returns on your savings, uh you know low returns on your you know in uh low returns on your pension investments or your your prospective uh retirement uh with extremely low income growth, you can see that that uh is a recipe for for popular discontent. I see the Wall Street Journal has a piece about the people who are supporting this guy in Mandami, the socialist who the mayor of New York, you know, the world's financial capital and you know the m mostly profile of someone you know complaining of you know um an activist whose main beef is about high Manhattan house prices. So you can see how if you will the sort of backlash against the status quo is to some extent I mean yes backlash is a big complicated backlash populism is not easy to you know to pigeonhole but to some extent I think that these um you know these uh interest rate policies uh have have have played a role just one more question on the book I before I move into the most important thing in relation to unintended consequences so we can talk about speculative bubbles we can talk about inequality which you do in the book uh talk you mentioned uh the Arab Spring where capital flow to emerging markets you talk about FTX crypto what what about Donald Trump?

SPEAKER_03 47:11

What about AI? Because I I this is my view I don't know and feel free to challenge it has low interest rates pulled the time series ten years forward? I mean would there be the advancements in artificial intelligence if there wasn't all this free money flushing around the place looking for a home? Um well there's two questions.

SPEAKER_01 47:30

One Trump so when Trump first got to you know got got to White House after the election of 2016 he he you know he he he was campaigning as I said mentioned on the book on the grounds the system was rigged and he was critical of the Federal Reserve. But the point was the moment he was in power back then as he's doing now is he was pushing for lower interest rates. And of course you know Trump being Trump he said one thing and then the next when he changes and he says of course I like low interest rates I'm a real estate guy what the hell do you think um so so yes he he did get in on on um to some extent by complaining about the system being the monetary system um being uh being rigged. As for AI um well as I mentioned the book you know if you put if you if you bring you know take down discount rates take down your interest rates very low it makes it attract to invest in um to make investments whose payoff is in the long distant future so and it also creates um inflates asset prices. Put that together it creates an environment that's quite that's very conducive to putting money into venture capital. Huge amounts of money flowed into VC into Silicon Valley right up till the end of 2021 when you have this you know spectacular explosion and then you know not more than not much more than a year later the the Silicon Valley Bank blew up. Whether that period of money into Silicon Valley directly uh engendered or facilitated the uh artificial intelligence gains that have then uh fed flu uh uh fed through into what I think we can call an AI bubble is I think debatable because apparently Google developed the first sort of chatbot I think sometimes in in the late 2010s with very little money apparently it's putative investment was like it was you know ten thousand dollars or something like that. You know this anyhow, you know but since then as you know they've all scaled up and now you know you know or or you know every every new chatbot iteration any new generation costs you know a hundred billion or two hundred billion to develop as they scale everything up. So is and and what's exceptional about the artificial intelligence um boom is it kicks off if you remember with the release of chat GBT by OpenAI in I'm saying sort of s around September 2022 sometime around that. You know with I'm sort of I may be out by a couple of months but roughly around that period. Now but this is a time when you know the fine we know the markets are all you know the bond markets down interest rates are up you know up and bond markets are in complete disarray there's a bear market even the Magnificent seven stocks are down I think they're down around 40% you know in uh in in before they suddenly turn around at the you know in in about November twenty two. So I th I think the AI um boom is and I could be wrong but I think it's well I think it's slightly an exception to the story. And and certainly um when I think you know when I I'm pr I'm about to write a um an afterword for the American paperback edition o of Price of Type. And one of the things I have to address is you know well the sort of underlying theme of sort of doom and gloom in my book. And there's been a certain quite a lot of doom, quite a lot of bad things to happen. But you have had this tremendous um you know return bounce back of the markets and um under with AI and AI you know apparently sort of adding a point to US GDP growth currently AI investment. And so I think I think that's anomalous you you don't normally see at the end of a of a a of a spective boom induced by easy money. You don't normally see them a new technology appear out out and and and lift the market. So um so we'll we'll we'll we'll see about that.

SPEAKER_03 52:19

But my for what it's worth my you know having you know I wrote a piece on AI last week and it does look to me as if the investment in AI is is um is is you know with the at the current state of technology is extremely unlikely to pay off but we'll have to wait and see that I know we're drawing to a close here and I'd like to finish up in terms of your most important thing and I want before I ask you that I'd like to just remind listeners and viewers okay you published your first book Devil Take the High Most History of Financial Speculation right uh right at the eve of the uh TMT bubble okay the tech bubble right then in 2005 you were asked to do some research on credit because you were talking about credit a lot and you you published crunch time for credit okay in 2005 then you released uh the price of time in 2022 again against consensus um highlighting the huge problem and straight away we saw a Silicon Valley Bank we saw real problems in the in in in the global economy so I suppose my question is it's very rare you meet somebody that is so prescient right and is willing to stand against the consensus because it can be a lonely place.

SPEAKER_01 53:45

How have you done it I think I think it's probably nature um that I remember my my fat my father wasn't you know wasn't wasn't economist or finance who didn't understand anything about he couldn't couldn't understand what I was writing but he he he always he always he disliked expressing what he called conventional opinions and his thought was that if you were going to that that to be conventional was to be boring because you know everyone to be conventional is to express a thought that has been expressed many times before. So I think I think I think I was slight I was slightly brought up to to think that one shouldn't express conventional ideas because convention but then um I I also for the last three years I've been keeping bees and what's interesting about bees you know and terrifying if you're beekeeper is that you know suddenly the bees should come up and they they all you know they attack you the same thing they they they you know they they are a superorganism. Um and um not always you know they go and do their little bit you know they forage and bring back but but but there are you know you know people don't really know but the there are I think it was around 150 uh species in Britain of solitary bees who don't actually uh exist in the hive. And you know I was brought up I'm speaking to you from West Somerset in England, a country um and that's why I was brought up and so I'm a country boy. And if you're country boy, you know you don't sometimes see anyone for a week and you you are you're on your own. And so um I think and and then you know as I said earlier I'm I was a historian so I have a sort of I have a very broad frame of reference. So I th I think that combination of being you know having an inclination towards history being brought up to to reject conventional views and thankfully not having read economics at at at universities. So my again go back to Jeremy Grant that he said we went at GMO when they had PhDs, uh economist PhDs at GMO it would take him he said it would take him two years to de-brainwash them. So I mean so a tremendous advantage not actually to to have done economics. And then I think yes to have been brought up to think that expressing conventional views is sort of boring and that therefore one's natural predilection should be to examine where the herd might be going wrong. And and that that I think ha has been quite consistent. I could just say you know finally I should say look, you know don't do this at home. From an investment perspective you can be you know this contrarious all very well to talk about all very well to write pieces about absolutely kills you from an investment perspective. So I'm for instance I um I wrote a piece about Ireland's property boom for the Spectator magazine in 1999 when Boris Johnson was the editor and he gave the he gave it the title which didn't make me very popular because he didn't consult me. He called it the potato tiger anyhow so anyhow and what I was saying is look, you know what all the Irish are now turning to real estate development. Well as you know it took another seven or eight years uh for the you know for the proverbial to hit the fan. Now I you know you know 15 years ago I was writing about you know China's real estate bubble and it took then it took another 10 years. So look the timelines are very difficult.

SPEAKER_03 57:45

It's very difficult from an investment perspective when you're actually employed by people and you've got some benchmark really difficult to um you know to employ to to employ a you know if you will a sort of thoughtful contrarian approach and therefore it what you know it does help and I had this at GMA it's it does help to have a an employer who who also takes long-term perspective in relation to Ireland I just make a comment on that and a couple of things you've said Edward in relation to Ireland I mean we've lived over the last couple of decades let's say since 2009 10 we've lived through the austerity and losing uh economic sovereignty and all that and it's amazing now we still see the repercussions of the unintended consequences as you cover very well in your book of ultra low interest rates because what happened in Ireland um was interest rates were suppressed obviously and you had savers pensioners who were getting zero or one percent on deposit buying property uh to get a rental yield competing against young families so a complete distortion which has which has led to a look a decreasing birth rate which is going to have implications for productivity growth into the future so I think it's just like a ripple effect which just ripples out I can I said just that because people often like to argue that um de you know demographics determine uh economics and and and and monetary policy but in fact as you observe that actually the monetary policy can determine your demographics it can it can determine as I mentioned earlier your immigration or or emigration flows and it can determine birth rates because when house prices are too expensive or when economies are depressed people do not have babies or they have they have fewer babies to be fair my final question and this has been this has been fascinating my final question to you is there'll be young people listening viewing this uh young graduates there's a lot of anxiety around ai um you know is the job I was looking at an article in the FT recently the job apocalypse or something like that what advice would you give to young people in terms of how they can add value in the future um well first of all I'm as I think as I at the state of the current technology I don't think AI is is poses a threat to jobs i there's a piece MIT put out a report 95% of the companies that they studied uh that companies that had collectively spent over fifty billion dollars implementing AI had seen no productivity gains whatsoever and that there had been no job losses just I think it was just media media and advertising I think were the two industries that have been affected and of course wherever the media's affected you just hear you never you never hear the end of it.

SPEAKER_01 1:01:04

But look but AI is interesting in some ways um I mean look it's it may change so you know I'm I'm not saying I'm just saying how things are now you know what AI is very good at doing it's very good at cribbing it's very good at uh copying what's out there and presenting it. Now that you know that and of course you know lots of students are using it to write their blasted essays. Now that that is utterly point I think it puts the premium you know we were talking earlier about thinking outside the herd think trying to think differently it puts a premium on not doing and not thinking in exactly the same way as everything else or or or put it another way and this is the way I think about it because I write journalism. I think I'm beginning to write when I write something I think well Christ could AI actually write the same rubbish as I'm writing and I think well no let's hope not and let's hope that there's a tiny bit of of original observation or intuition or conclusion or even humor in my piece that hasn't already been there. So in a way uh AI, you know what you could almost say AI enjoins you to be more original. And frankly if if that's too much for you you might as well go and do some physical job, you know, plumbing or electrics because AI as far as I can see is is going to lead it's going to leave the world. If it were to actually achieve and I'm not at all convinced it will achieve its promise but let's say it achieves superintelligence then of course you know the plumber is going to be the higher highest paid paid person on earth and um and the good news from my perspective of anti sort of academic economists is that all the economists and great number of other second rate econom uh academics will will be out of a job and that will um you know be no bad thing.

SPEAKER_03 1:03:05

I'm finishing up now by I I I interviewed uh your friend and and and colleague uh Russell Professor Russell Napier very recently and uh Russell said that there's one thing the AI can't have uh which will probably keep likes of us in a job is have courage and sometimes you need courage to stand out from the crowd and actually to be the contrarian um but I really really enjoyed this uh Edward it was fascinating I am going to strongly recommend that people read your works your your books I'll put links to all those in the chat um uh you're very generous with your time and thank you very very much I enjoyed the conversation too some fascinating insights there Alan in conversation with Edward Chancellor from Somerset so really he's an expert on interest rates isn't he's an expert on interest rates it at a time Ivan when everybody now is talking about interest rates but Chancellor comes from the Hayekin school okay uh that's free market uh free market capitalism Adam Smith is it no I mean basically you're looking at Hayek you're talking about Minsky Hyman Minsky these he spoke a lot about Minsky who's he there's a famous uh economist and mostly associated with this Minsky moment okay and what a Minsky moment is that when you have stability artificial stability it breeds instability so what do I mean by artificial stability? That's central banks keeping interest rates low manipulating the price of money you might have stability for a short period but you're only storing up instability. That's a Minsky moment and that's what we're seeing. Now all of this is unraveling in real time right we have a front seat view of this now and Chancellor is at the forefront of this free market approach. Central banks should just stay out of get out of the way okay because they are uh manipulating the the price of money and when you manipulate the price of money you cause huge problems we see in Ireland okay uh we see where interest rates were zero and we had pensioners competing with young families to get mortgages they couldn't get on the property ladder because uh the grey market was was was crowding them out okay that's a very good example in Ireland of how you when you manipulate interest rates you get negative consequences.

SPEAKER_02 1:05:37

Edward made a few references to Ireland what's his take on Ireland?

SPEAKER_03 1:05:40

Yeah you know tongue in cheek uh you know maybe gave us a little bit of a of a kick it was warranted right in some parts because we you know I'm not gonna say we but there was criticism there in relation to a small number of the of property developers getting huge uh loans and that has had catastrophic implications as we know right we're not going to go through that story but that couldn't have happened if there wasn't a central bank keeping interest rates artificially low in Europe so you know there were there there is a bit more to it than just uh you know greedy developers borrowing they couldn't borrow if the rates weren't were were were were as low as they were what's Eddie working on now okay so you you mentioned that he worked in Boston so he was with GMO one of the biggest uh funds in in the US uh Jeremy Granton is the famous uh steward of that fund so uh they're obviously very close close friends and uh Grantham is is writing his memoirs and no better than Mr Chancellor to help him with that.

SPEAKER_02 1:06:40

So in summary what is the most important thing from Edward Chancellor?

SPEAKER_03 1:06:46

Most important thing clearly is that when central banks artificially manipulate the price of money you get serious implications not just in terms of debt asset bubbles but growing inequality and there's one chapter in his book and it's a very telling it's the end it's the end of the book and the title is Are the pitchforks coming? That tells you all you need to know about where he thinks this is going.

SPEAKER_02 1:07:14

Alan thank you and that concludes this episode of the Most Important Thing podcast and if interest rates or any other aspect of investing or economics spikes your interest in this deep dive that we're taking with each episode please check out the Truth Series also curated by Dr. Alan O'Sullivan which provides an e-learning module for you to learn more about these topics. Well that's it from Alan and from me today. Thank you for joining us and until the next time goodbye thank you for listening or watching on YouTube.

SPEAKER_03 1:07:51

I sincerely hope you found this episode useful this podcast is about slowing down the conversation of focusing on first principles and long-term thinking and the ideas that shape outcomes over time. Because when everything feels important knowing what matters the most is your edge it is the most important thing. It should be said and important to say that this podcast is for information and educational uses only and does not constitute financial advice. All views expressed are those of the guests and the hosts although I am a qualified financial advisor and I am a certified financial planner everyone's circumstances are unique. So before you make any decision in relation to your finances investing or financial planning please seek a qualified financial advisor. There's loads more to come on the most important thing and we can't wait to see you next time. Thank you