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    TIP505: The Price of Time w/ Edward Chancellor

    enDecember 18, 2022

    Podcast Summary

    • The Age-Old Role of Interest Rates and Debt Jubilees.Debt jubilees have been historically used for large debt forgiveness but today, financial repression or inflation can be utilized by keeping interest rates below inflation, thereby sneaking into the early stages of ongoing debt jubilee.

      Interest rates have been around since ancient times, with Mesopotamians recording loans on clay tablets. Interest has played a crucial role in societies throughout time and has caused boom and bust cycles. Debt jubilees, or official forgiveness of debt by rulers, have been used historically to level large amounts of debt and start anew. Today, debt jubilees occur through financial repression or inflation, by keeping interest rates below inflation. Therefore, we are already in the early stages of an ongoing debt jubilee. While forgiving all debt may make headlines, we have found another sneaky way of doing it without explicitly saying so.

    • Debt Jubilee vs. Quantitative EasingDebt Jubilee can lead to a quicker recovery than quantitative easing and low interest rates. Efficient economies charge a price on time, but regulators struggle to find fair levels of interest on loans.

      The case of Iceland after the 2008 crisis shows that a debt Jubilee, or a sort of default, can lead to a quicker recovery than quantitative easing and low interest rates. Time is considered man's most precious possession, and interest rates are a way of putting a price on how we spend our time. Income smoothing is the concept of borrowing and repaying debts over time to even out income growth. Efficient economies are driven by a charge on time, as seen with the medieval practice of demurrage charges on slow ships. Regulators are still trying to solve for fair levels of interest on loans despite attempts at regulation throughout history.

    • People's time preference and John Law's economic ideas that shaped bankingAge affects borrowing willingness and John Law's belief in increased money supply and paper currency led to the formation of central banks.

      People's time preference or degree of impatience affects their willingness to borrow and pay interest. Younger people are often more impatient and eager to borrow, while older people who don't expect their income to grow are less keen to borrow. A famous figure in economic history, John Law, developed an interest in economics and proposed a land bank, as well as the idea that money is just a yardstick of value. He believed that replacing currency backed by precious metals with paper currency and increasing the money supply would lead to economic prosperity. He started a private bank in France, which grew to become an extensive holding company acquiring various assets, including the Louisiana Company. Law's private bank eventually became a central bank or a national bank, called the Bon Royale.

    • Lessons from John Law's Mississippi BubbleBeware of manipulating the money supply and inflating asset prices to avoid disastrous consequences such as those experienced by the Mississippi Company. Realize profits during asset price booms and monitor commodity and food prices to mitigate the impact of inflation on the cost of living.

      John Law's Mississippi Bubble was an extraordinary achievement, but it fell apart due to inflation. Law's decision to withdraw currency from circulation and deflate it proved to be his downfall. This teaches us that manipulating the money supply in a bid to prop up asset prices can lead to disastrous results. It is important to beware of bubbles, especially when stocks trade at valuations that are abnormally high relative to historical norms, as occurred with the Mississippi Company. Inflation can also take a toll on people's cost of living, which highlights the need to monitor commodity and food prices. Realization of profits during asset price booms is an important consideration since wealth is numerical in nature and may lack real substance.

    • John Law, the Father of Modern Central BankingLaw's success in implementing low interest rates laid the foundation for modern central banking, but his failed scheme serves as a cautionary reminder that monetary policy alone cannot cure the complex problems of a struggling economy.

      John Law, the first fiat money central banker, was a low interest rate advocate and succeeded in his aim of bringing down interest rates through monetary policy. Law provided the framework for modern central banking, making him relevant in today's times. However, Law's scheme, designed to alleviate the French nobles, ended in a resounding failure leading to a toxic mixture of deflation, unemployment, and soaring government debt. The collapse of Lehman Brothers in 2008 can be compared to the French economy after the death of Louis XIV. Both had a huge mountain of debt, bad debt deflation, depression and a hope that waving a monetary wand can cure the problem.

    • The Dangers of Low Interest Rates and the 2% Tipping PointLow interest rates can lead to foolish risks and lending crises. The 2% tipping point is the threshold at which people take these risks. However, recent research suggests it may actually be 3%. Be cautious and weigh risk and return during low interest rate periods.

      Low interest rates encourage people to take more risks, which increases the likelihood of speculative manias and lending crises. The 2% tipping point, coined by John Fullerton and popularized by Walter Bagehot, refers to the threshold at which people will take foolish risks to make up for income losses. However, recent research suggests that the threshold may actually be 3% yield. The key function of interest is that it is the price of anxiety or the price of risk. Policies that encourage people to use money to dispel economic problems can ultimately lead to currency depreciation and collapse in value. It's important to carefully weigh risk and return when making investment decisions, especially during periods of low interest rates.

    • The Dangers of Lowering Interest RatesWhile lowering interest rates may appear to benefit the economy by boosting borrowing and reducing unemployment, it can also lead to risk buildup that may be challenging to identify. The absence of a natural rate of interest can indicate that the policy rate is set too low, reflected in dangerous events occurring in the financial system.

      Lowering interest rates to encourage borrowing may bring an end to deflation and lower unemployment, but it also encourages a buildup of risk in the system, which may be hard to identify. The concept of a 'natural rate of interest' has a thorny history, but modern monetary policy makers use it to determine whether policy rates are too low or too high. Edward Chancellor argues that aside from inflation and deflation, other things like asset price inflation and credit booms show that the policy rate has been set too low. Hence, the absence of the natural rate, indicated by dangerous things happening in the financial system, reveals the presence of a policy rate that is too low.

    • The Vicious Cycle of Low Interest Rates and Low ProductivityLow interest rates can result in zombie companies and hinder creative destruction, leading to low productivity and wages. It is crucial to consider the impact of financial policies on the economy to avoid a vicious cycle.

      Low interest rates can lead to misallocation of capital which can result in the formation of zombie companies and hinder creative destruction in the economy. Lack of creative destruction then has an impact on productivity which feeds through to low wages. Low productivity, in turn, feeds back into low-interest rates. The academic economist nowadays tends just to have an abstract view of the economy, which is far away from the reality one can observe. There are constant feedbacks between finance, policies and the financial system and the economy. Therefore, it is essential to consider the impact of financial and monetary policy on the economy to avoid the vicious cycle of low productivity and low-interest rates.

    • The Importance of Interest Rates in Our Lives and the EconomyInterest rates put a price on time, making it the most important economic variable. We need to understand its role in history and society to avoid errors and financial market crashes.

      The interest rate is central to all of human life and capitalist system, as it puts a price on time. Without applying a discount rate, an interest rate, you cannot have a price, resulting in infinite prices. Interest is the most important economic variable, and we have lost sight of what it does and the richness of its functions. The universality of interest is what my friend Jim Grant calls 'the cause interest, the universal price.' The errors of our way are being recognized as inflation rises, interest rates increase, and financial markets crack. The Price of Time is a book that explores the significance of the interest rate throughout history and its critical role in today's society.

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    On today’s episode, Kyle Grieve and Clay Finck continue their conversation on Investing: The Last Liberal Art by Robert Hagstrom. We discuss details on why using the right explanation for a business is so important to a good investment thesis, simple ways to improve your reading to get more out of the books and content that you consume, how to use simple mathematical concepts to improve your decision making in real-time, how to understand better System I and System II thinking and how it directly applies to investing, some of the latest mental models Kyle has learned from interviewing recent guests, and a whole lot more! IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 03:34 - How to use the proper explanations in your analysis to determine the right comparable best. 06:18 - Why Tesla is so misunderstood. 10:33 - Why the economics of Dino Polska make it an invalid comparison to other grocers. 12:02 - The power of narratives in investing and how we can guard ourselves from getting overly optimistic. 17:43 - How to optimize reading for learning. 40:18 - How to use Bayes theorem to tip odds in your favour and change your position sizing. 45:45 - Why value and prices become disconnected, and how human psychology plays into this. 50:20 - Why intuition (system I thinking) is so difficult to rely on in the stock market. 01:09:22 - How to make thinking in mental models a habit. 01:14:59 - Some of the latest mental models Kyle has learned from interviewing some of his latest guests. And so much more! Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Buy Investing: The Last Liberal Art here. Buy The Great Mental Models here. Learn more about Mental Models here. Buy Poor Charlie’s Almanck here. Buy More Than You Know here Follow Clay on Twitter and LinkedIn. Follow Kyle on Twitter and LinkedIn Check out all the books mentioned and discussed in our podcast episodes here. Enjoy ad-free episodes when you subscribe to our Premium Feed. NEW TO THE SHOW? Follow our official social media accounts: X (Twitter) | LinkedIn | Instagram | Facebook | TikTok. Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts. SPONSORS Support our free podcast by supporting our sponsors: River Toyota Sun Life The Bitcoin Way Meyka Sound Advisory Industrious Range Rover iFlex Stretch Studios Briggs & Riley Public American Express USPS Shopify HELP US OUT! Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

    TIP640: Investing: The Last Liberal Art w/ Clay Finck & Kyle Grieve

    TIP640: Investing: The Last Liberal Art w/ Clay Finck & Kyle Grieve
    On today’s episode, Clay and Kyle dive into Robert Hagstrom’s book — Investing: The Last Liberal Art. Charlie Munger is famous for popularizing the use of mental models and pulling key ideas from related fields and implementing them to the world of investing. In today’s episode, that’s exactly what we do, starting with the fields of physics, biology, sociology, and psychology. IN THIS EPISODE YOU’LL LEARN: 00:00 - Intro 01:27 - How learning new mental models can help us be better investors. 10:49 - Concepts in physics that we can carry over to investing. 25:35 - Lessons we can learn from evolution and complex adaptive systems. 42:00 - What leads to a stock oscillating above and below the intrinsic value. 54:15 - The primary psychological biases as lead to investment mistakes. 01:05:43 - Why Lumine’s incentive structure is a structure worth studying. And so much more! Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members. Buy Investing: The Last Liberal Art here. Read Seeking Winners blog here. Buy What I Learned about Investing from Darwin here. Buy The Uncertainty Solution here. Learn more about Charlie Munger’s speech here. Learn more about Mental Models here. Read Li Lu’s write-up on value investing in China here. Buy Poor Charlie’s Almanck here. Follow Clay on Twitter and LinkedIn. Follow Kyle on Twitter and LinkedIn. Check out all the books mentioned and discussed in our podcast episodes here. Enjoy ad-free episodes when you subscribe to our Premium Feed. NEW TO THE SHOW? Follow our official social media accounts: X (Twitter) | LinkedIn | Instagram | Facebook | TikTok. Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts. SPONSORS Support our free podcast by supporting our sponsors: River Toyota Sun Life The Bitcoin Way Meyka Sound Advisory Industrious Range Rover iFlex Stretch Studios Briggs & Riley Public American Express USPS Shopify HELP US OUT! Help us reach new listeners by leaving us a rating and review on Apple Podcasts! It takes less than 30 seconds, and really helps our show grow, which allows us to bring on even better guests for you all! Thank you – we really appreciate it! Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

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