Is Interest the Price of Time?

A Borrow Smart Concept
Is Interest the Price of Time?

I was reading excerpts from 'The Price of Time' by Edward Chancellor. He points out that interest rates are the 'fundamental pricing gauge that ripples through all aspects of the market' and that interest rates are time, or "the Price of Time".

He echoes what we teach in our course: that with cash flow, you can spend, save, or repay, but what stood out to me was the idea that interest is also time.

Lower interest rates accelerate time.

What he's saying is that any goal you have—'spend,, save, or repay'—is accelerated by lower interest rates, meaning things take less time. You want to spend money now to buy a house; lower rates make that happen faster; you want to save for the future; and lower rates make it easier for companies to borrow (and make a profit) so your money grows faster. If you want to repay debt, lower interest makes that easier as the friction to repay is lower.

Higher interest rates decelerate time.

What he's saying is that any goal you have,'spend, save, or repay' is decelerated by higher interest rates, meaning things take more time. You want to spend money now to buy a house; higher rates make that happen slowly; you want to save for the future; and higher rates make it harder for companies to borrow (and make a profit), so your money grows slower. If you want to repay debt, higher interest makes that difficult as the friction to repay is higher.

Controlling interest rates means controlling time. According to Edward, interest is the cost of time. One reason why those who decrease interest rates stay in power for a longer time is that they promise to keep rates low for a longer period, while those who increase rates are often replaced by those who pledge to speed up time by keeping rates low.

TIP: Consider this for yourself, when rates go up and down how does it impact your financial goals?

From the book: The four stages of artificially low rates:

· The first issue is malinvestment. Rates below the natural rate drive funds into projects with below-average expected returns, lowering the investment hurdle. For instance, this has contributed to the overinvestment in unproductive sectors like real estate prior to the 2008 Great Financial Crisis.

· The second problem is inflated asset prices. This includes unaffordable housing and the concentration of wealth in the hands of the few, hindering economic growth due to low consumption propensity.

· The third concern is the financialization of developed economies, where finance, insurance, and real estate sectors surpass manufacturing. Cheap money leads to excessive debt-driven corporate share buybacks and industry concentration, harming consumers and paving the way for financial crises

· The fourth challenge is the "zombification" of companies that would otherwise go bankrupt in a normal interest rate environment. Low rates artificially keep these weak companies afloat, hampering overall economic productivity. This can go on until interest rates inevitably rise.

We are at the 'fourth challenge' now, IMO.