Reflections of a Moneylender

By nature, I am a moneylender.  Of course, in order to lend money, one first has to save it.  That I started to do when I was five years old.  Whenever my father came home at the end of the day, he would give me whatever pennies he had in his pocket.  After a year, I had accumulated about $2.00. This was 1952, so adjusted for inflation, that was the equivalent of just over $22.00 today, no small piece of change for a six-year-old boy.  Did I use the money to buy candy or a toy?  No.  I had too much fun counting my money.  But it wasn’t until I grew up, got a job, and moved into my own apartment that I was able to lend money at interest. That’s when I really enjoyed counting my money.

I have read that the total amount of global debt, which includes the debt of governments, businesses, and households, is around $300 trillion.  I have also read that if we divide this figure by the total number of people in the world, around 8 billion, this means that the average person in the world owes $37,500.  To many, that is an alarming figure.  But then, since for every dollar that was borrowed, there was a dollar that was lent, this means that the average person is owed $37,500.  So, I guess it all just balances out.

However, while it is true that the number of dollars borrowed must always be exactly equal to the number of dollars that are lent, the number of people that borrow money vastly exceeds the number of those that do the lending.  And while the debtor is most grateful for a loan upon receiving it, he soon comes to resent the man who lent him that money, as if he did him harm.  As Polonius advises his son in Hamlet, “Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”

Never having borrowed money, I wouldn’t know about dulling the “edge of husbandry,” but I certainly agree with the first part. Lending to friends and family is a bad idea.  In the words of Philip Gibbs, “It is better to give than to lend, and it costs about the same.” Much better is to lend to those with whom you have only a business relationship.

But even here, one can run into trouble.  In The Merchant of Venice, Shylock did not make the mistake of lending to family or friends, but he still got cheated out of what he had coming to him. Portia wins her case against Shylock with a most specious argument for the simple reason that those in the courtroom to whom she addressed her words were probably debtors themselves and were looking for any excuse to rule against Shylock.  And since the same might be said of those in the audience watching this play, they naturally approved of her reasoning as well.  The lesson a moneylender should take from this is that it is not enough to lend to those with whom you have only a business relationship.  One must do so anonymously.

Fortunately, this is easy to do in the modern age.  Inasmuch as I lend by way of money market funds, I have no idea who it is that is benefitting from my loan, and they have no idea who it is that lent them the money.  The loan is not only free from risk, but also impervious to the hostility of those who are in my debt, and secure from that blathering about how the “quality of mercy is not strained.”

Until recently, however, things were bleak.  Interest rates were practically zero for years.  But starting about a year ago, things have been picking up, and I now have almost as much fun counting the dollars I receive each month in interest as I did counting the pennies I had when I was a child. And I smile every time I hear that Jerome Powell, Federal Reserve Chairman, is pondering not whether he will continue to raise interest rates, but by how much.

Many economist and financial experts, however, are chagrined.  They worry that these increases in the interest rate will plunge the economy into a recession.  And this is seconded by politicians, who always want interest rates to be kept low, knowing that low interest rates stimulate the economy and prop up the stock market.

As I listen to their concerns, I think back to 1995.  I was watching CNBC one day, and several experts were discussing the economy, which was doing great, and the stock market, which was still going up. One of them commented on the fact that short term interest rates, such as that paid by money market funds, was around 6%, while inflation was running around 3%.  She said that a real return of 3% (the nominal rate minus the rate of inflation) was the sweet spot, the perfect level of interest rates for the economy.  The other two she was talking to agreed. And indeed, for the next several years, the economy continued to prosper, the bull market continued its run, and we ended the decade with balanced budgets.  According to the Congressional Budge Office, at the rate we were going, we’d have the entire national debt paid off in ten years. As a moneylender, I was pleased. What was there not to like?

Well, George W. Bush didn’t like it.  While campaigning to become president in 2000, he declared, “If we’re running balanced budgets, that just goes to show that the American people need a tax cut.” He was elected. He cut taxes.  And that was the last time anyone saw a balanced budget or ever will again.

In any event, if we had a real return of 3% today, that sweet spot they were talking about on CNBC, then given a 6% inflation rate, short term interest rates would be 9%. Instead, with short term rates being about 4.5%, the real return is still negative, or -1.5% to be exact.  And so, like Shylock, I’m being cheated.  I don’t want a pound of flesh.  I just want that 3% real return.

Will I ever get that again?  Maybe.  Politicians and other government officials would never raise interest rates at all were it not for inflation.  But there’s the rub.  With a recession, a lot of people lose their jobs, but most people remain employed.  When inflation heats up, however, everyone is affected. Every week, people are reminded when they buy groceries and fill up with gas that the cost of necessities keeps going up. They become furious, and when election day arrives, they avenge themselves on any politician who happens to be in office.  That’s when politicians give their silent consent to higher interest rates.

And so, I’m hopeful that things will improve.  After all, in 1981, when inflation was running around 10%, I was getting a 17% return in a money market fund. Those were the days!

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