If you loan someone money. You trust them.
To repeat. If you loan someone money. You trust them.
The only financial class that loans money to people they don’t trust are people who employ bounty hunters or goons and will break your legs if you don’t pay the money back.
If a bank doesn’t know you. They will ask for references. If they don’t trust your references they will ask for collateral to be held in the bank or in trust.
But, if they don’t trust you. They WILL NOT LEND YOU MONEY.
This goes for private credit (shadow banking.) Get that in your head. If a loan happens there is trust.
If you do trust someone and you loan them money, let’s say you loan someone $1000 for one month, the interest you charge is "bus insurance.”
The $10 you charge them isn’t because you don’t trust them, as I said you wouldn’t loan them money if you didn’t trust them, that fee is just in case you get hit by a bus in the next month. Or that your wife liquidates your accounts and runs off with the tennis pro.
That fee, that 1% interest fee is against the world at-large. It’s a fee to protect against the uncertainty of the future.
If you want to start a business making AI dildos the fact that a bank won’t loan you money is not because they don’t trust you. It’s because the world at-large predicts this is not a good business. They don’t trust the economy to support your idea. If you have already made millions on chocolate dildos they might loan you the money.
A private individual may loan you money at a high interest rate or may not. But, it’s not because they don’t trust you. It’s not about trust. It’s about uncertainty.
The reason historic bond rates average 5% is reflective of the world at-large i.e. the odds of a war or invasion. Genoa might own a city state 1000 only for that city state to get destroyed. You can’t collect from the dead.
The people who are saying 5% is “normal” and that the last 15 years was an anomaly are correct… and not thinking clearly. But, the duration matters here. A 5% rate for a 4 year bond is the what would reflect the likelihood of a war.
The 5 years is currently at 4.43%. We anywhere near a state of war. To compare a 5% rate on a 4 year bond from 1820 to a 5% rate on a 30 Yr bond (or even a 10 Yr bond) isn’t valid.
What happened in the late 90s? The Soviet Union collapsed. The fall of the Soviet Union started in the late 1970s. The possibility of war fell and interest rates followed.
In a post-war (post-world war) world like we are in the trend should be towards 0% interest rates not sticking to the risk pricing of human history when we were shooting at each other every decade.
What has happening and is happening is the people who remember the world when there was risk of war are no longer in finance. And the people in finance are manufacturing reasons to freak out because they only know how to make money in low interest rate regime. People have forgotten how to build businesses that make money AND have forgotten what risk is.
If you win the lottery everyday the possibility the lottery ends is a risk. But, it’s not the same thing as being drafted into a war.
As soon as everyone who remembers the Cold War dies y’all will be better off.
—AJ