While all these issues have subtly different causes, it appears that one broad factor has been the monetary policy of central banks since before the financial crisis of 2008. Very low or even negative interest rates – “quantitative easing” and a general desire for the state to prevent any serious market turbulence – have, arguably, created a far more serious and intractable set of problems. In fact, the desire to put out the fires of market turbulence with the hose of cheap money has, in fact, created the risk that when a "forest fire" does take finally hold, it will be devastating. 

The parallel between overly cautious forestry management, and monetary policy, is one of many colourful and instructive ideas that come from The Price Of Time, by Edward Chancellor. This book examines centuries of economic history and looks at the supposedly dry topic of interest rates, and why charging interest on loans is important and often misunderstood. He goes all the way back to the ancient world. Interest rates are older than money itself – rates existed even during times of barter. Chancellor uses all kinds of colourful stories, such as the Mississippi Company of the early 18th century, or the 1840s railway boom in the UK, to show what happens when interest rates are suppressed and money printed without limit, almost always by states seeking to “boost” an economy for various reasons.

Chancellor brilliantly explains why far too few economists and politicians understand the importance of the time value of money. Simply understood, for most people, they’d rather have money in their hands today than have it tomorrow. To compensate them for not having their money now, they are paid interest. Take away this compensation, why would anyone save, and how can we know the best uses of a scarce resource such as capital? (This ultimately explains why usury laws are fundamentally misconceived.) Money is a claim on resources; those claims stem from production of goods and services.

Money isn’t merely a unit of exchange (although it is that). It embodies values made possible through intelligent work in pursuit of an end. That’s why it is right that those who want to borrow these resources' claims, hence preventing their being used elsewhere, should pay a price (interest) for this. Without being able to price such resources over time, the capital made possible for tomorrow by the forgoing of consumption today is wasted. Interfere with the price of time, and you misallocate resources, or "malinvest", such as ending up with Chinese "ghost cities," the endless environmental degradations of the former Soviet Union, questionable infrastructure projects in Western democracies, property booms, tech bubbles, cryptocurrency frenzies, and all the rest of it. (It is worth reflecting, as an aside, that ultra-low rates are bad on ESG grounds – for instance, environmentally damaging property booms, inflation to commodities, and other forces.)

Time to speak up
Why explain all this in such detail? Because far too few economists and those who direct policy do so. Too often they've fallen down on the job. When considering all the various problems of recent years, such as political populism, weak wage growth and rising inequality, it appears that mainstream politicians and their media cheerleaders will do everything to avoid talking about the state’s interference with interest rates. Chancellor shows how some central bankers, such as former Fed chairman Ben Bernanke, have been at pains to play down the role of quantitative easing in pushing up inequality. The attitude seems to be "nothing to do with me, I am afraid." If that is true, one has to ask what central banks are for, beyond being lenders of last resort.

What Chancellor has done in one book is more valuable than hundreds of central bankers’ and politicians’ speeches. He’s shown why central banks’ suppression of interest below the level achieved in a genuine free market has been so harmful. For example, he shows that artificially low interest rates have been major forces in holding down wage growth and real incomes. This is not an intuitive point, so let me explain. Far from increasing investment, and the productivity growth that drives incomes, low rates do the opposite. When rates are very low, what incentive does a bank have to lend to a productive enterprise? And why should a borrower be careful to use the capital wisely if there is no real cost? If real firms can stagger on like a "zombie," they tie up capital that should be redeployed to more profitable enterprises, even if that means allowing more bankruptcies and painful change. Like a body that does not get rid of dead cells, the system gets sick and sluggish.

The ultimate absurdity of negative interest rates, as we have seen in Switzerland, Japan and Denmark in recent years, is that they destroy capital and penalise long-term thinking, and reward short-term gambling instead. 

The author explains why it has been so easy, and so tempting, for governments to go down the low-rate path. When governments spend more than they take in through tax, the "financial repression" of low rates means that savers and the general populace will pay for the shortfall by falls in real incomes and the erosion of capital. But this process takes time for its baleful impact to show up. This is why politicians with their eyes on the next election are so easily led off the path. Low rates also are also popular with large, established firms: company executives with their share option plans can use cheap leverage to buy back shares and boost earnings per share, and to hell with what happens later when their firms’ balance sheets are burdened with debt. Leverage is like a drug: the initial effects are nice, but the hangover is brutal. Like an addict who does not want to contemplate life when sober, even the more scrupulous politicians blanche at the idea of forcing voters to confront living within their means.

Wealth managers today know that the yield-chasing episodes of recent years – as seen in the explosion of interest in private markets, forms of financial engineering and securitization – have many of their origins in a world of ultra-cheap money. And they also know, or should do, that the decades of very low rates have benefited those who already own assets at the expense of those who do not. The resultant rising inequality has fueled political populism and demands for such tempting, if disastrous, ideas such as wealth taxes and other forms of redistribution. I think it is vital for wealth managers who understand this to speak out, and urge a return to a more sane way of setting the price of money.

The US Federal Reserve put up interest rates again this week, and while this may seem a tough argument to make, the world is arguably a better, saner place where there is an upward-sloping yield curve, and when saving does make some sort of sense, and when those who forgo consumption for future returns are compensated for this. Wealth managers and their clients shouldn’t mourn the end of ultra-low rates.

The Price of Time by Edward Chancellor is a marvellous book, and I heartily recommend it to those who want to explain some of the odd episodes we have been living through. It is a beautifully written, incisive and wise tour through economic history. I appreciate that some may think my thoughts here are abstract rather than general, but truly understanding interest and the role it plays is about as central a wealth management topic that there is.