Author Edward Chancellor neatly summarizes why interest rates are so important, “Interest rates are the price of time.” Since time is a consideration in every financial transaction that makes up the economy, interest rates are a foundational concept to understanding behavior.
I heard this in a podcast about Easy Money, the most recent memo from Howard Marks.
See also:
- The interest rate fallacy shows us how availability of credit is associated with interest rates
- Lowering the federal funds rate causes all asset classes increase in value
- When the price of time changes it large impact on the economy so the best way to protect against the downside by enjoying the upside
Links to this note
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What Founders Should Know About Interest Rates
Between 2008 and 2021, the market was operating under zero-interest rate policy (ZIRP). That changed in 2022 back to historically normal interest rates (5-6%) set by the Federal Reserve.
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Interest Enables Transactions Across Time
Interest rates are a technology that allows people to transact across time. Without the concept of interest, it’s only possible for two parties to transact with what is immediately in front of them, in that very same moment.