The Interest Rate Curfew
It’s often said that “nothing good happens after 2 AM.”
Last week, Tom Gayner, CEO of Markel, joined The Knowledge Project to discuss how he thinks about balancing the short and long-term as the head of a giant holding company.
One of those frameworks compared interest rates to curfews.
If you go to bed at 6, you’ll miss a nice dinner party, date night with your spouse, or time with your family. It is no fun and probably long-term harmful to your mental health.
If you go to bed at 10, you probably enjoyed the evening but can still maximize tomorrow - the best of both worlds.
Stay out until 12 a.m., and you probably have a hangover, but it's no big deal. Consistently stay out until 4 a.m.; life eventually catches up with you.
Interest rates work the same way.
If they’re too high (the 6 p.m. bedtime), the economy will take less risk and, as a result, have a smaller upside. Long-term, innovation and progress grind to a halt.
If they’re just right, an ample amount of risk will be taken, and risky bets will occasionally pay off, resulting in more upside.
If they’re too low for too long, life catches up with you. Losses mount, inflation runs wild, and we take on too much risk.
There are long-term consequences for operating too far into either extreme, with the Goldilocks zone being the right place for optimal long-term health. It’s a good reminder for us whenever things feel too far out of place.
