A History of Interest Rates by Sidney Homer and Richard Sylla is a favorite business book of mine. I consider it a must-read for those interested in capital markets.
Don’t let the soporific title fool you. Homer’s and Sylla’s 700-page opus stimulates and enlightens without the intellectual's disposition to ponderousness and didacticism.
Homer and Sylla reveal the natural long cycles of interest rates (decades with bonds compared to years with stocks); that usurious, loan-shark triple-digit interest rates are nothing new. Nor are negative interest rates a contrivance of 21th-century government-manipulated debt markets. Yes, brief, anomalous episodes of negative interest rate episodes appeared briefly in the late 1800s and 1930s (but, of course, only with government bonds and only because of market-discombobulating government mandates).
Interest rates precede money, they precede even barter. The concept of interest rates arose concurrently with the concept of commerce: You lend me a bushel of corn today, I’ll repay in kind with two bushels in five months, the additional bushel the interest.
That interest rates arose first might surprise some people. Isn’t interest the price of borrowing money? Well, sort of, but its function is more primal, more disparate, more important. Interest rates are fundamentally allocators of capital between current and future conception. Give me a price that persuades me to forgo consumption today so that you can employ that capital to enable me to consume more tomorrow.
(Sidebar: The early 20th-century Austrian economist Eugen von Böhm Bawerk believed a society’s level of sophistication was revealed in interest rates: The more intelligent and morally strong the people, the lower the rate of interest, Böhm Bawerk opined. He was speaking of free market interest rates, not central-bank-manipulated interest rates. In Böhm Bawerk’s era, market rates of interest throughout the principal trading nations were historically low – 2.5% to 3.5% – for long-term prime credit. I am sure Böhm Bawerk failed to fathom negative interest rates, the proposition being too ridiculous to consider. No one, and I mean no one, willingly defers consumption today for the promise of less consumption tomorrow in all but familial transactions.)
Optimism, and the reason for, and human nature.
Bitching about the horrors of the present and of those that await dominate the news. The world is continually spiraling to hell in a handbasket, so you read time and again. A crisis always awaits, a catastrophe always looms, annihilation always hides just over the horizon.
Those willing to exploit your proclivity to pessimism are all too prevalent because they know most will succumb to the sophistry – look only to climate change and the apocalyptic prognostications concerning 0.04% of the atmosphere’s composition. I can only wonder what clever dystopian scenes, necessitating trillions upon trillions of dollars of redirected “investment,” when the prognosticators weaponize nitrogen (78% of the earth’s atmosphere) and christen it the crisis du jour.
Knock it off, will you? Unless you’ve been shanghaied into sex slavery in the Far East, commandeered into ship breaking on the shores of Pakistan, or sentenced to exist anywhere in sub-Saharan Africa, you have it damn good. You’ve been given the time and resources to contemplate your belly button, and what is contemplated most days isn’t worth a damn.
Life, regardless of where you are planted, is materially better today than in any epoch. Most of us would be inconsolable if forced to relinquish the technology and the material possessions of today for those of only 10 years in arrears. You fail to appreciate it all because the change is imperceptible. The good times progress with the fanfare given to growing grass.
Homer and Sylla offer a Caesar's banquet of insight into capital markets. On first reading, many observations might be dismissed as afterthoughts. Subsequent readings can be revelatory. The surrounding reality of continual improvement is one. Homer and Sylla extracted a few obscure, but keen, blurbs from Thomas Babington Macaulay's intimidating five-volume, 2,500-page doorstopper of a tome The History of England published in 1848.
The more things change, the more things…, well, you know. Everyone, everywhere, all the time thinks he lives in a purgatory until a boot-strapping sentient mind sets it all straight. Here is Homer and Sylla’s truncated Macauley quote (with some slight refinement on my part) reproaching pessimism from The History of England as pasted in The History of Interest Rates:
“Englishmen in the eighteenth and nineteenth centuries were as alarmed by the size of their national debt as are many Englishmen and Americans today,” Macaulay writes about the British zeitgeist in the mid-nineteenth century. “Other countries had been relieved by inflation and bankruptcy of much of the burden of debt, but the victorious English, proud of their credit and dependent on confidence and on imports, probably considered no such alternatives.
“At every stage in the growth of that debt, the nation has set up the same cry of anguish and despair. [After the Peace of Utrecht] the nation owed about fifty millions; and that debt was considered, not merely by . . . fox-hunting squires . . . but by profound thinkers, as an encumbrance which would permanently cripple the body politic.
“Under the prodigal administration of the first William Pitt, the debt rapidly swelled to £140 million. . . . Men of theory and men of business almost unanimously pronounced that the fatal day had now really arrived. . . . It was possible to prove by figures that the road to national ruin was through the national debt. Better for us to have been conquered by Prussia. . . . And yet [one] had only to open his eyes to see improvement all around him, cities increasing, marts too small for the crowd of buyers, harbors insufficient.
“Yet like Addison’s valetudinarian, who contrived to whimper that he was dying of consumption till he became so fat that he was shamed into silence, she went on complaining that she was sunk in poverty till her wealth . . . made her complaints ridiculous.
‘Nevertheless . . . the nation [became] richer and richer” (emphasis mine).”
(You can find Macaulay’s un-ellipsisized, unedited verse here (volume four).
Many today whimper like Addison’s valetudinarian, except unlike Addison’s valetudinarian they are too egoistic to suffer shame; and, therefore, refuse to cease whimpering.
Here we are 175 years later after Macaulay and the U.S. national debt tallies to $35 trillion. I hardly favor a national debt, being as steeped as I am in the Austrian School concept of economics. Government debt is government spending. It is privilege granting, it is malinvestment on a hedonistic level. That said, I sleep soundly at night. For one, unlike in Macaulay’s day, the government that issues the debt concurrently issues the money to pay that debt. The whole damn thing could be eliminated with a keystroke if the government jettisoned the Treasury-debt standard and adopted the modern monetary theorist’s approach. (This is by no means an endorsement of MMT.) For another, the U.S. dollar’s status as the world’s reserve currency remains challenged. The world demands dollars and Treasury securities. We might do it wrong, but everyone else does it worse.
(Sidebar: We’ll know, and we’ll know unequivocally, that a debt crisis is imminent: Interest rates will rise to usurious heights while the dollar’s value will sink to Titanic lows. There’ll be no mistaking something is amiss. You won’t need to be told.)
Pessimism is the default intellectual position and the great enabler of the savior complex. Montaigne noted the propensity for “saviorism” 500 years ago, having written approvingly of Ferdinand II of Spain sending no lawyers to Spanish America, lest they should multiply disputes among the Indians. He wished physicians too had been forbidden there, lest they make new ailments with their cures.
To accentuate the negative is understandable. Pessimism is profitable. “If it bleeds, it leads” is a familiar limerick among journalists. Frightening you is the surest bet to arouse your interest.
When has pessimism aroused you to action? Never. If anything, it dissolves you into statis: If I drive a car, I’ll crash; if I board a plane; I’ll ruin the atmosphere; If I invest in a company, I’ll lose my money; if I start a business, I’ll tumble into bankruptcy; if I write this Substack article, I’ll be ridiculed. So, we sit sullenly on our hind quarters complaining, worrying, lamenting, catastrophizing, and criticizing. Pessimism might motive you to take to the streets, but now you’re only complaining, worrying, lamenting, catastrophizing, and criticizing with the crowd. Where will that get you?
Optimism leans you forward, conflate it with faith, religious or otherwise, and a belief you’re striding in the right direction and that you can stride to reach a desirable end. Only the present is certain, everything beyond is mystery. You act on your optimism because you believe in the outcome, even with the sober knowledge you could fail. You enter a marriage, an investment, a business proposition, a walk in the park expecting to be improved by the experience with no guarantee. But so what? What’s the alternative? The optimist knows it’s worth doing. Certainty offers zero return.
A 96-year-old Charlie Munger elicited a few chuckles at Berkshire Hathaway’s annual shareholders meeting three years ago when he said, “I’m optimistic about life. And if I can be optimistic when I’m nearly dead, surely the rest of you can handle a little inflation.”
Yes, we can always handle a speed bump (and that’s all the spat of inflation has been) on the road to a better life. Nearly all the reports you read about crisis, collapse, and catastrophe, are just that – speed bumps. Stay optimistic. You have no choice if you care to succeed
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