Howard Marks: The Importance of Having ‘Natural’ Interest Rates

In his recent interview at the Onde Investir 2024 event, Howard Marks uses an analogy of movie ticket prices to explain the potential problems with government-controlled interest rates.

Key points:

1. Price controls can lead to unintended consequences: Just like forcing movie ticket prices down leads to overcrowding and reduces enjoyment, artificially low interest rates set by governments can have negative effects

2. Equilibrium prices are important: Both movie tickets and interest rates should ideally be at a natural, market-determined equilibrium price

3. Government intervention can distort markets: Setting prices below equilibrium creates imbalances, like movie theater overcrowding, and can have ripple effects throughout the economy

Here’s an excerpt from the interview:

Marks: This is what happens when governments control prices.

That’s what interest is, it’s the price of money, and let’s say we think of going to the movies. Let’s say the movies costs $10.

And some people go because they enjoy it and they have 10 to spend, and other people don’t go because they don’t want to part with $10.

They think that’s a lot of money.

Let’s say the government passes a rule that the money… that now the movies cost $2. So now everybody wants to go to the movies.

And the movies are too crowded, and nobody has a good time because there are too many people there, and the lines are too long.

So it’s not a natural interest rate, it’s not a natural price to go to the movies.

Similarly I think we should have a natural price for money, and when the government sets it too low there are all kinds of ramifications.

You can listen to the entire discussion here: