John Bull and Two Percent

The economics profession has long had a vigorous academic argument over “natural” interest rates. What would rates be if we could somehow remove all the subjective actors—central banks, commercial lenders, government agencies—that conspire to set them? What would nature do if we left it alone?

It’s an academic argument because, in the real world, we can’t do the kind of experiments that would produce a definitive answer. Guesses are all over the board. History, however, suggests that rates below 2% are neither natural nor sustainable. Worse, bad things happen when they get that low.

This isn’t a new revelation. People noticed centuries ago how low interest rates led to speculative bubbles that always ended badly. We are at the end stage of one such bubble right now. Some expect a soft landing. I hope they’re right, but it would be the first time.

Today I’ll continue discussing Edward Chancellor’s remarkable forthcoming book on the history of interest rates, The Price of Time: The Real Story of Interest. Most of this letter will be an extended quote from the book, which I hope will entice you to read the rest. It is truly a must-read as we enter a volatile and possibly dangerous economic era.