Funny Money: Edward Chancellor’s “The Price of Time”

Published in Nikkei Asia 20/ 3/ 2023

It was big news when Japan recently announced that Professor Kazuo Ueda would become the next governor of the Bank of Japan. Three decades ago, a personnel change at the top of Japan’s central bank would have merited a minor slot on national TV news – and barely a mention in international press. Now it is a major media event, the financial equivalent of the investiture of a new pope.

The way in which dark horse Ueda triumphed over the supposed favorite, Deputy Governor Masayoshi Amamiya, added to the drama. The question transfixing observers was whether Ueda’s BoJ would raise the rock bottom level of Japanese interest rates, thereby lifting the spirits and profits of banks but at the same time, risking a return to deflation. Or whether he would stick to the basic stance of his predecessor, Haruhiko Kuroda, and move slowly and delicately, if at all.

Such questions are being asked not just in Tokyo but also in many other financial capitals. Japanese bond yields are the lowest in the world and Japanese investors have gone overseas to seek higher returns. “The Bank of Japan is riding a tiger,” according to Ambrose Evans-Pritchard of the U.K.’s Daily Telegraph. “The country is the world’s largest creditor with $3.6 trillion of external net assets… A sudden repatriation of funds would set off contagion throughout the international system.”

Whether this scale of alarm is justified remains to be seen, but it is clearly the case that transitioning from zero or even negative bond yields to a “normal” level, as most of the rich countries have been doing over the past 18 months, is a tricky business. For never before in history have interest rates plunged to such depths. How did it happen and what does it all mean?

A recently published book puts these strange happenings into context. Its author Edward Chancellor certainly has the gift of serendipity. In 1999, when the dotcom mania was in full swing, he gave us “Devil Take the Hindmost: A History of Financial Speculation.” Six years later, in “Crunch Time for Credit,” he chronicled the credit orgy that spawned the Global Financial Crisis of 2008 and prompted then President George W. Bush to utter the immortal words, “this sucker’s going down.”

In the end, the collapse of the global financial system was averted by desperately improvised emergency measures and the “sucker” not only survived but thrived, having learned almost nothing from the near-death experience. Cue the appearance of Chancellor’s latest volume: “The Price of Time: The Real Story of Interest,” which comes at the end of what he terms “the everything bubble.”

You might think that the history of interest rates would be as dry as dust, but Chancellor brings the subject to life with a wealth of anecdotes and walk-on characters both famous and obscure, from Karl Marx to the brilliant fraudster John Law, from Benjamin Franklin to the Neapolitan abbot Ferdinando Galiani, described by Nietzsche as “the most profound, sharp-sighted and perhaps also the most salacious man of his century.”

As well as being entertainingly written, the book is highly political, indeed polemical in parts as the author blames 21st century central bankers for such ills as declining productivity and widening inequality. Add in other forms of governmental overreach, and we may be embarking on “a new road to serfdom,” Chancellor warns, channelling the spirit of Friedrich Hayek, author of the influential paean to free market liberalism, “The Road to Serfdom.”

The message of the book is that borrowing and lending are integral to human civilization and attempts to manipulate the interest rate by rulers and religious figures can cause great harm. Yet making the case is a tough assignment, as Chancellor knows full well.

“Moneylenders have always received a bad press,” he writes. “Over the centuries all – well, nearly all – the greatest minds have been aligned against them. Aristotle, Plato, St. Augustine, Thomas Aquinas, Dante, Luther and Shakespeare have each had a go at the wretched usurer… Marx detested interest, but then so did Hitler.”

What defense can be offered against such an intellectual barrage?  The strongest one is the reality of how human beings have behaved and continue to behave. In a fascinating disquisition on the ancient world, Chancellor notes that “the Mesopotamians charged interest on loans before they discovered how to put wheels on carts.” There were even examples of what we would call “regulatory arbitrage” – Hammurabi’s Code of 1750 BC laid down strict rules on money-lending, but left loopholes which gave scope for alternative arrangements.

In the rich countries today, it would be considered absurd to abolish mortgages or to cap the yield on junk bonds, but attacks on “usurious practices” continue. In 2017, U.K. payday lender Wonga was driven out of business by a media campaign led by the Archbishop of Canterbury.

In the early 2000s, the Japanese establishment decided to crush the small business loan and consumer loan sectors, despite the fact that the major players were stock market-listed companies that had been in business for many decades. The idea was that Japanese banks would fill the gap in the market, but that was wishful thinking as they lacked the credit-scoring capability required for high risk lending. The damage in terms of lost economic activity is likely to have been significant.

Far more malign, in the author’s view, is the belief that low interest rates are a panacea for all economic troubles, a seductive idea that has cropped up again and again over the centuries.

In his prologue, he excerpts a fascinating debate by correspondence between two French intellectuals of the mid-19th century: Pierre-Joseph Proudhon, an anarchist famous for his dictum “property is theft,”  and Frédéric Bastiat, a witty pamphleteer and free-trade advocate.

Proudhon declared that interest is also theft and proposed reducing it to zero. Bastiat foresaw that if lending was not rewarded, it would dry up and the economy would shrink, harming the working class in particular.

Bastiat made a lot more sense, but Chancellor believes that Proudhon’s dream has finally been realized. Not by revolutionary anarchists, but by a cabal of neoliberal central bankers who reduced interest rates to the lowest level ever in the second decade of the 21st century. The result? Not wealth for all, as Proudhon anticipated, but instead the economic equivalent of the 1998 sci-fi film “The Truman Show.”

Like the story’s protagonist, who is unaware that he is living his entire life on the set of an endless reality TV program, “we have come to live in a controlled environment, with its fake money, fake interest rates, fake economy, fake jobs, and fake politicians. Our bubble world is sustained by a combination of passive acquiescence and powerful vested interests.”

You do not have to agree with Chancellor’s conclusions to sympathize with his sentiments and to enjoy the force with which he expresses them. His chapter on the Japanese bubble economy of the late 1980s makes salutary reading. The Bank of Japan, like all modern central banks, prioritized the consumer price index above all other indicators. The fact that credit growth was explosive and land and stock prices were heading for the stratosphere seemed of little consequence.

In the end, the collapse of Japan’s monumental bubble took down the financial system and condemned what was once the growthiest economy in the G7 to long years of deflationary stagnation. Asset prices do matter. Ignoring them cost Japan dearly.

But what about now? Even though Japan was the first country to adopt super-low rates, there is not much evidence of manic speculation in Japanese asset markets. Stock prices have indeed risen over the last 10 years, but valuations have not. The Nikkei Index is higher because the fundamentals have improved. Specifically, corporate Japan’s once paper-thin profit margins are now much healthier.  Several other East Asian markets are reasonably priced too. The everything bubble  is by no means everywhere.

That probably explains why inequality does not seem to be worsening in Japan. Income inequality, as measured by the Gini coefficient after taxes and transfers, is little changed since the turn of the century. In terms of wealth distribution, Japan is one of the most equal countries in the OECD, and here too there has been no change in the Gini score for two decades.

So far, the economic version of “The Truman Show” is largely an American phenomenon, with some support from the British and Europeans. Judging from the results so far, you could even say that the Bank of Japan has done a pretty good job over the last decade, albeit one made a lot harder by Ministry of Finance moves to raise the consumption tax at inopportune moments, thereby derailing the economy.

The era of central bankers as technocratic superheroes started with Paul Volcker, chairman of America’s Federal Reserve from 1979 to 1987, who ended the chronically high inflation of the era. His successors, in the U.S. and elsewhere, basked in reflected glory while offering interest rate cuts as the solution to every financial blow-up.

That era is well and truly over. The failure to foresee and control inflation has destroyed the credibility of central banks in the U.S., Europe, Britain and elsewhere. They are talking tough now, but the suspicion is that they would ease off, even at the cost of letting inflation rip, in the event of another financial crisis.

The one exception is Japan where expected inflation is still far below the BoJ’s target of 2% on a sustainable basis. If Kazuo Ueda comes within reaching distance of it during his tenure and delivers a smooth and gradual transition to higher interest rates without any economic blowback, he will be entitled to don a superhero costume as the very last of the breed.