Friday 4 November 2022

Of interest

I've written a review of Edward Chancellor's important book about interest rates, The Price of Time, for The Critic.

By slashing interest rates to historic lows, central bankers turned off one of the most important signals in the economy. Since this often required pricing money, quantitative easing became the bedfellow of unnatural interest rates in the new economic orthodoxy. QE began as part of a desperate effort to save the banking system from collapse but, emboldened by the apparent lack of inflation it caused, central banks began using it for lesser crises. The Bank of England had fresh bouts of QE in 2012 to help it reach its inflation target — i.e., to raise inflation — and again in 2016 “to help the economy after the EU referendum”. When the Federal Reserve engaged in its third splurge of QE in 2012, the stated objective was to help the jobs market.

Throughout this period, interest rates were kept at rock bottom for fear of dampening economic growth. Society quickly became addicted to cheap money. House prices rose to absurd levels, made possible only by freakishly low mortgage rates. Corporations took on debt to carry out a string of mergers and buyouts which produced returns for shareholders without the businesses having to go to the trouble of becoming more productive. Zombie companies proliferated, making just enough money to avoid insolvency, but not enough to ever pay back their debts.

All of this was sustainable only if interest rates never returned to normal levels. That, in turn, required inflation to remain abnormally low forever. In other words, it was not sustainable at all. The longer it went on, the bigger the bang would be when the bubble burst.

It's not paywalled so have a read.

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