11/27/2023: Is a Lost Decade Upon US?

Boom is followed by Bust

It’s book review Monday again. I recently read The Price of Time: The Real Story of Interest by Edward Chancellor. It’s a pretty substantial book and details the comprehensive history of interest. Interest actually predates coined money when the interest was paid on livestock and corn loans. Throughout human history, people have had complicated relationships with interest. In some cultures, charging interest is considered exploitative and usurious. For example, a Muslim is not allowed to benefit from lending money or receiving money from someone. Some cultures are more permissive on interest but in general charging high interest rates is considered immoral and exploitative. In most of the western world, people are generally receptive to borrowing below 10%. But very low interest comes with its own set of problems. Sometimes it’s a deep recession. Sometimes it’s a revolution. It’s not uncommon for debt to be forgiven after a dynasty change and the debt reset would enables a new era of prosperity. This book was published in July 2022 when the Fed first started raising rates. It spent a lot of time talking about how ultra low rates could get us into trouble and the author was very worried about what ZIRP will inevitably bring. In summary, here are the things that can really go wrong with low interest rates:

• Inequality: in an ultra low rate environment, people want to borrow money but only people with good credit and solid financial standing can borrow. People who are considered high credit risk are not able to borrow money. As the asset bubble inflates, the rich get richer through leverage. The poor are left behind.

• Asset bubble and unnatural selection: If people can borrow at 0% to make 1%, they will do it. A 1% return is hardly productive but people will bid up asset prices and arbitrage when money is free. The author mentioned ultra low interest rates will first push up prices of financial assets like real estate, stocks and crypto and keep a lot of zombie companies alive as these companies don’t have to be very productive to stay afloat. But eventually the financial asset inflation will leak into the real economy…

• Inflation and bubble burst: Once the financial asset inflation leaks into the real economy and causes inflation, central banks will start raising interest rates, which would make the interest payments on the huge debt load unsustainable, depress financial asset prices and bankrupt many companies with weak fundamentals. The author said most depressed economic periods such as the Great Depression or Japan’s lost generation were preceded by an unsustainable credit boom. The bigger the asset/credit bubble, the longer and more painful the economy will suffer. The author didn’t exactly say it out loud. But he is implying the prolonged ZIRP period will be followed by a painful readjustment period that will last a long time.

One thing I realized from reading this book is that things are progressing in slow motion. It takes years for us to realize the environment we are in. Japanese people didn’t know they were in a lost decade until they were years into it and they didn’t know the lost decade would eventually become the lost generation. People have been talking about China’s unsustainable real estate bubble for years but I believe people didn’t realize how bleak it is until recently. In other words, we live in a frog boiling environment. On a day to day basis, people are still debating if the environment is deteriorating. But chances are we are already in a lost decade after the 13-year long ZIRP period. Easy money will be followed by hard money. Boom will be followed by bust. There is no free lunch and free money will eventually come with deep costs, which we will have to pay for in the coming years.